The Finance (No. 2) Act 2017 introduced changes to the taxation of non-contractual pay in lieu of notice (“PILON”).

Broadly, the changes mean that non-contractual PILON does not fall within the £30,000 exemption if it represents “basic pay” that would have been received had the notice been worked. This is treated as “post-employment notice pay” or “PENP” which is subject to income tax and NIC.

These changes took effect from 6 April 2018. Until recently, the position of payments received during 2018/19 as a result of a termination occurring in 2017/18 was unclear.

Employer Bulletin 70 clarifies the position and states that the change applies “to payments or benefits received on or after 6 April 2018 in circumstances where the employment is also ended on or after 6 April 2018”. In other words, the tax change only has effect for payments made in, and relating to terminations occurring in, tax year 2018/19 and subsequent tax years.

Employers will only be liable to pay NICs on any part of a termination payment they make to their employees that exceeds the £30,000 threshold from 6 April 2019. This measure was initially designed to come into force on 6 April 2018 but the government delayed the employer tax element by a year. This was confirmed in a HMRC update issued in November 2017.