In the current economic climate, it is highly likely that companies will be and/or may need to consider redundancies. Setting aside the employment law considerations, there are also taxation aspects to consider particularly if payments-in-lieu of notice or other enhancements to a redundancy/ termination package may be under consideration.

The starting point is to establish whether or not a payment is specifically exempted under tax legislation, for example, a payment on death, or is the payment to be made contractual or non contractual. The taxation treatment of the majority of payments made on termination fall within the contractual/ non contractual category and would be taxed as follows:

Contractual payment - This is a payment made under the precise terms of a contract of employment, for example, the contract states that if the employment is terminated, the employee will receive a cash payment of £15,000 on termination. The payment will be taxed as earnings and subjected to income tax and employer/employee Class 1 National Insurance.

Non contractual payment - This is a payment that is not made under the terms of the contract, and usually as a direct consequence of the contract being broken on termination, that is, it is treated as damages. The payment is not made in return for services; the first £30,000 should be exempt from tax.

Redundancy payments - Statutory redundancy payments are exempt from tax but any additional compensation paid and/or a payment-in-lieu of notice has to be added to the redundancy payment for the purposes of quantifying whether or not all of the payments to be made on termination are within the £30,000 exemption.

Payments-in-lieu of notice - HMRC views all contractual Pilon payments as earnings taxable under PAYE. HMRC also believes that certain non-contractual Pilon payments might be taxable as earnings where Pilon is given as an automatic response on redundancy/termination.

Action - The issue is complex and employers need to carefully consider how to proceed to minimise the risk of creating unnecessary PAYE/ National Insurance liabilities for employees and themselves at what is a difficult and trying time for all concerned.  

Talk to John Dixon, Employment Tax Specialist, on 0114 280 2930 or email john.dixon@gvt-sheffield.co.uk if you are expecting to make payments of this type so that they can be dealt with in the most tax efficient manner.

www.gvt-sheffield.co.uk