Changes to Taxation of Termination Payments: A Degree of Backtracking

Plans to tax notice pay from April 2018 will be limited to basic pay only.

The Chancellor confirmed in his Autumn Statement that plans to tax all notice pay (whether provided for in the contract or not) from April 2018 will be limited to basic pay and will not extend to bonus or other payments that the employee would have received if they had worked their notice period. 

This is good news for employers as it removes a layer of complexity and confusion inherent in the previous plans.

From April 2018:

• all payments in lieu of notice, whether provided for in the contract or not, will be treated as earnings (rather than a termination payment) and will be subject to income tax and employer and employee NICs;
• the first £30,000 of a termination payment will not be subject to income tax or employer or employee NICs;
• termination payments which exceed £30,000 will be subject to income tax and employer (but not employee) NICs on the excess over £30,000 (currently termination payments are not subject to employer NICs at all).