Small but significant changes have been made to the way certain termination payments are taxed, as Richard Walden explains. We’ve also compiled a list of other employment law changes taking place this month. Read on and find out what applies to you.
Tax and PILONs – are you up to date?
PILON stands for ‘Pay in lieu of notice’, clarified by ACAS as ‘a payment made to an employee when employment is terminated without notice, instead of the employee working through a notice period and receiving pay in the normal way’.
PILON is paid when employment is terminated immediately. This is what makes it distinct from ‘garden leave’, where an employee is still technically employed during the notice period, despite not being present at work. It is not normally paid in cases of gross misconduct.
Many employers will include a PILON clause in a contract outlining conditions under which it can be paid and what would be paid (ie whether it would include benefits accrued during the notice period). Without contractual provision, according to ACAS, ‘a termination of employment with PILON is likely to be a breach of contract’.
What changes from 6 April 2018
Taxation of PILON used to depend on whether an employee’s contract contained a specific right for the employer to make payments in lieu of notice.
- If the employee’s contract contained a specific right to be paid in lieu of notice then the payment was taxable.
- If the employee’s contract did not contain a specific right to be paid in lieu of notice then the payment was not taxable. This was because it was considered to be a compensation payment for breach of contract.
From 6 April 2018 however, all PILON payments are both taxable and subject to National Insurance Contributions (Class 1 NICs), regardless of the contract wording.
What the new regulations DON’T affect
Almost everything paid to an employee is taxable and subject to NICs. There are a limited number of exceptions, and these remain in place after 6 April:
- Statutory and other redundancy payments*
- Settlement payments made as result of a termination under a Settlement Agreement (these are essentially compensation payments for leaving the employment and giving up the right to bring employment law claims against the employer)*.
* Only the first £30,000 of the total of all termination payments above can be paid without deduction of tax/NI.
Another change coming in regarding termination payments is a clarification that the tax exemption for payments for injury/disability will not apply to injury to feelings, unless it is a psychiatric injury or other recognised medical condition.
Foreign service tax relief has also been removed (though retained for seafarers).
Other changes happening in April 2018:
Gender pay gap reporting deadline
Applies to: Employers with 250 or more employees in Great Britain
Private and voluntary sector organisations with 250 or more employees must now publish information on their gender pay gap – according to regulations known as the GPGR – by 4 April 2018 – and every year going forwards. Employers have to report average hourly pay and bonuses for men and women as well as the proportion of men and women receiving bonuses.
The Equality and Human Rights Commission has guidance on how to compile the data. Slightly different reporting duties apply in Scotland and Wales, so make sure you’ve complied with the right ones!
Rises in statutory parental pay and sick pay
Applies to: UK employers and employees
Statutory maternity, paternity, adoption and shared parental pay will rise from 140.98 to 145.18 (standard rate, while statutory sick pay will rise from £89.35 to £92.05. The earnings threshold for both rises from £113 to £116. Find the full list of benefit and pension rates for 2018-19.
Increases to National Living Wage and National Minimum Wage
Applies to: Employers and employees (excluding self-employed people, company directors and volunteers)
The rates change every April, and as of April 2018 the rates are as follows (reproduced from https://www.gov.uk/national-minimum-wage-rates under the Open Government Licence v3.0):
|Year||25 and over||21 to 24||18 to 20||Under 18||Apprentice|
|April 2017 (previous)||£7.50||£7.05||£5.60||£4.05||£3.50|
|April 2018 (current)||£7.83||£7.38||£5.90||£4.20||£3.70|
If you need any help or advice on any of these areas please do drop us a line on email@example.com.