With the new tax year fast approaching, Marian Derham gives a breakdown of the upcoming changes that employers will need to bear in mind.
Changes to termination payments and tax exemptions
Notice payments and tax exemptions
Employers who are in the process of negotiating exit packages should take account of tax changes to termination payments as there could be an advantage in timing the termination of employment prior to 6 April 2018.
Effective from 6 April 2018, employers will be required to split a termination award into:
- amounts treated as taxable earnings; and
- amounts benefitting from the £30,000 income tax exemption
Furthermore from 6 April 2018, the tax treatment on the first £30,000 of a termination award will no longer be dependent on whether there is a contractual payment in lieu of notice (“PILON”). HMRC’s intention was to make it clear that all PILONs, rather than just contractual PILONs, are taxable. All employees will therefore pay income tax and Class 1 NICs on the amount of basic pay that they would have received if they had worked their notice in full, even if they are not paid a contractual PILON. Therefore notice payments and payments in lieu will be taxable and the £30,000 tax exemption will not apply.
If an employer pays more than the PILON the remaining balance should be tax free up to the first £30,000. Statutory redundancy payments will automatically fall within the £30,000 income tax exemption.
The new rule only applies where both the termination of employment and the payment occur on or after 6 April 2018. If termination of employment occurs prior to 6 April 2018, the current rule relating to the taxation of PILONs will apply so that non-contractual PILONs will still attract the £30,000 tax exemption (provided they are not ‘auto-PILONs’ where there is a custom and practice of making payments in lieu). There is therefore a potential tax benefit if termination of employment occurs prior to 6 April 2018.
From 6 April 2018 there will no longer be a tax advantage in not having a contractual PILON clause in an employment contract – previously some employers would choose not to have a PILON clause in order that a non-contractual PILON payment (and non auto-PILON) could attract the £30,000 tax emption. From 6 April, employers should therefore include a PILON clause in their employment contracts to protect restrictive covenants if an employer wants to terminate without notice and make a payment in lieu of notice.
The proposed change requiring employers to pay employer NICs on payments above the £30,000 exemption has now been delayed until April 2019.
Injury to Feelings Awards – limited exemption
From 6 April 2018, Injury to Feelings Awards will no longer be exempt from tax unless the award is in relation to a psychiatric condition or other medically recognised condition.
Foreign Service – removal of tax relief
From 6 April 2018, Foreign Service relief for employees who are resident in the UK at the termination date will be abolished and such relief will only be available for an employee (or former employee) who is not resident in the UK for the entire tax year in which their employment terminates.
The new rule relating to Foreign Service relief only applies where both the termination and payment occur on or after 6 April 2018.
New compensation limits
The following increases to the compensation limits and minimum awards that are payable under employment legislation will take effect from 6 April 2018:
- The limit on the compensatory award for unfair dismissal will rise from £80,541 to £83,682;
- The limit on a week’s pay (for the purposes of calculating statutory redundancy payments and the basic award for unfair dismissal, for example), will increase from £489 to £508;
- The guarantee payment payable to an employee in respect of any day will increase from £27 to £28; and
- The minimum basic award in cases where a dismissal is unfair by virtue of health and safety, employee representative, trade union, or occupational pension trustee reasons will increase from £5,970 to £6,203.
Pay – National Living Wage (NLW) and National Minimum Wage (NMW)
The government has announced that from 6 April 2018 the NLW and NMW rates will increase. The NLW, which is applicable to those aged 25 and over, will rise from £7.50 to £7.83 per hour. The changes to the NMW are as follows:
- 21 to 24 year olds: from £7.05 to £7.38 per hour;
- 18 to 20 year olds: from £5.60 to £5.90 per hour;
- 16 to 17 year olds: from £4.05 to £4.20 per hour; and
- Apprentices: from £3.50 to £3.70 per hour
While these changes will be of benefit to employees, employers who are planning to recruit during 2018 will need to factor these increased costs into their budget.
Coming into force in April 2019…
Duty to include details in payslips: further information will need to be included in the payslips which employees receive. If an employee’s pay varies due to the time worked, information regarding the number of hours worked by the employee (for which they are paid), must be listed in the payslip. This can be an aggregate number of hours or separate figures for different types of work.