Whenever advising clients on the preparation of contracts of employment I would always spend some time discussing the advantages and disadvantages of including an express payment in lieu of notice (PILON) clause. The main advantage of not including an express PILON clause was that any payment in lieu of notice could be paid without the need to apply any statutory deductions (assuming there was no custom and practice of making payments in lieu of notice).
However, legislation has now been introduced which means that from 6 April 2018, any payment in lieu (regardless of whether there is an express PILON clause or not) is now taxable. The change applies to payments or benefits received on or after April 6, 2018, whether contractual or non-contractual, in circumstances where the employment also ended on or after April 6, 2018. Employers are now required to calculate the amount of basic pay excluding bonuses, referred to as post-employment notice pay (PENP), the employee would have received had they worked their full notice period. This amount is taxable as earnings and subject to Class 1 National Insurance Contributions (NICs). The first £30,000 of a termination payment that is not PENP remains exempt from Income Tax, and any payment made to any employee that relates solely to the termination of their employment will continue to have an unlimited employee NICs exemption. The proposal to subject all termination payments above the £30,000 threshold to employer NICs has been delayed until April 2019.
The legislation ensures that PENP calculations are not to be applied to statutory redundancy payments. These are always taxable as specific employment income and subject to the £30,000 exemption where appropriate. Non-contractual payments and benefits made to employees in return for their agreement to vary their duties or earnings may, in theory, fall within the £30,000 exemption. In addition, the legislation clarifies that the exemption from tax for payments for injury and disability is not intended to apply to payments for injury to feelings, except where the injury amounts to a psychiatric injury or other recognised medical condition.
Whilst this change now makes this issue more straight forward, there are still many other issues to consider when preparing contracts of employment (and a staff handbook). As such I would always recommend that an employer seeks professional advice and assistance when preparing these documents so that all of these issues can be properly considered. For those of my clients (very few) who may question whether all of the effort of preparing employment documents is worth it, I will normally respond with the quote from H Jackson Brown Jnr, “The best preparation for tomorrow is doing your best today” .
For help or advice on employment law matters, please contact Sydney Mitchell LLP on 0121 698 2200.
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