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Changes to termination payments could cost firms looking to lay-off staff

Local accountancy firm Newby Castleman is warning employers making termination payments to departing staff that they could end up incurring increased costs, following recent changes to the law.

The changes affect how non-contractual payments in lieu of notice (PILONs) are taxed. Before these changes came into force, any contractual PILON was subject to income tax for the employee and Class 1 National Insurance for both the employee and employer.

However, if a PILON was non-contractual, the payment may have qualified for a £30,000 tax-free exemption. Where the £30,000 exemption was in point, the liability to Class 1 National Insurance for both the employee and employer was completely eliminated.

From 6 April 2018 these rules are revoked and, regardless of whether the termination payment was contractual or not, an element of the termination award may be deemed ‘post termination notice pay’. If this is the case, the deemed pay amount will then be subject to income tax for the employee and Class 1 National Insurance for both the employee and employer.

Kirsty Horobin, Tax Consultant for Newby Castleman, said:

“Firms may not be prepared for these recent changes to non-contractual compensation packages, and should be prepared for higher redundancy costs if they are planning to let go of staff as part of a company restructure.

“Employers should also bear in mind”, continued Kirsty, “that the government intends to make further changes, affecting the National Insurance liability on termination payments, in 2019. These changes were due to come into force from 6 April 2018 but have been postponed.

“Managing non-contractual termination payments can be a complicated business, and any employers who feel confused by these changes, or any other part of the financial process, should consider contacting us for professional advice.”

Newby Castleman is one of the Midlands’ leading independent accountancy firms, with offices in Leicester and Loughborough. It offers a range of specialist financial services, business and tax advice for individuals and businesses. For further information, telephone the Leicester office on 0116 254 9262, the Loughborough office on 01509 263500 or visit the website at www.newbycastleman.co.uk.


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