Changes to taxation of termination payments - Draft Legislation published
  • 1st Sep 2016
  • Article written by Louise Purcell
  • Share:

HMRC has published draft legislation changing the taxation of termination payments. The legislation is intended to come into force in April 2018 but the draft legislation is open for consultation until 5th October,

The proposed changes include:-

  • Making all PILONs (payments in lieu of notice) taxable. This would apply whether or not they are contractual.
  • Requiring employers to play employers’ NICs on sums over £30,000.
  • Taxing payments for injury to feelings.  


There is currently a conflict of judicial authority on whether or not injury to feelings payments should be taxed and so, greater certainty will be welcomed by practitioners.  Whilst the rationale of taxing injury to feelings payments appears questionable, the legislature is clearly looking to balance the need for certainty and to avoid the abuse of tax free termination payments, with the need to compensate victims fairly and to encourage parties to settle their differences without recourse to the courts.

Many employers enter into Settlement Agreements with outgoing employees, whether to settle disputes or to agree terms, where employees are being paid in excess of their statutory entitlement.  It is important that Settlement Agreements are well drafted, to ensure that the employer is protected, as far as possible, from any further issues. The tax treatment of various elements of termination packages can be difficult to navigate.  

Whilst employment lawyers and HR professionals are likely to welcome further certainty on issues relating to taxation, there are always going to be difficult issues with settlement agreements and it is always advisable to take specific legal advice in each situation.