Taxation of Termination Payments

From 6 April 2018 new rules in relation to the taxation of termination payments come into force.

Previously where a written contract of employment was silent as to notice pay,  an employer could make a notice payment gross and it fell within the £30,000 exemption from tax available on termination.  This would often be beneficial to both employer and employee as the employee could receive a greater sum than he or she would otherwise have been entitled to at no additional cost to the employer.  Instead of paying the tax and national insurance on the payment to HMRC the employer could pay the gross sum to the employee.

Where there is a written pay in lieu of notice clause in the contract of employment any notice payment will be fully taxable as it is considered to be a contractual payment.

As from 6 April, however, even if there is no pay in lieu of notice clause in your contract of employment, you will be deemed to have received a payment in lieu of notice in respect of basic pay for any unworked notice period.  This will be fully taxable and subject to national insurance.  Any benefits received over and above basic pay for unworked notice can still fall within the £30,000 exemption from tax and national insurance.