Historically, the term 'termination payment' has been used as a generic summary for a lump sum payment, normally (but not always) made to an employee at the time the employment comes to an end. The term generally encompasses redundancy payments, 'golden handshakes', payments in lieu of notice (PILONs), and a range of other similar payments. The wide-ranging nature of such payments resulted in a complex series of tax rules emerging, which were often difficult to navigate.
Until April 2018, there was potential scope for employers to manipulate the rules by structuring arrangements to include payments that would ordinarily be taxable, in order to minimise the income tax and National Insurance due. The main area of concern was whether the well-known £30,000 tax-free exemption applied to a particular payment. However, in an attempt to increase fairness across all taxpayers, the rules governing all termination payments were reformed from 6 April 2018. The aim of the revised rules is to provide clarity in ascertaining the amount representing basic earnings during the notice period to ensure that it is subject to tax and NICs.
Sarah Laing is an author for accountingcpd. To see her courses, click here.