Tax and termination payments
The tax treatment of termination payments has changed significantly over recent years. The changes have aligned the rules for tax and secondary National Insurance contributions (employer (NICs)) by making an employer liable to pay NICs on termination payments they make to their employees. An employer is required to pay NICs on any part of a termination payment that exceeds the £30,000 threshold.
In addition, all payments in lieu of notice (PILONs) are both taxable and subject to Class 1 NICs. The legislation requires the employer to identify the amount of basic pay that the employee would have received if they had worked their notice period, even if the employee leaves the employment part way through their notice period. The amount is treated as earnings and not subject to the £30,000 Income Tax exemption. All other termination payments are included within the scope of the £30,000 termination payments exemption.
It is expected that any employer NICs due on termination payments will be collected in 'real-time', as part of the employer’s standard weekly or monthly payroll returns and remittances to HMRC.
Source: HM Revenue & Customs | 04-10-2021