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Employees facing termination might be wondering what their entitlements are in relation to payment and taxes. Knowing the tax implications of termination payments is essential to adhere to regulations and laws. To give you a helping hand, we’re going to discuss the topic here.
It depends
Termination payments are either able to be partially or fully taxable. Or, in some cases they are completely exempt. It all depends on the circumstances surrounding them.
The payment can consist of Payments in Lieu of Notice (PILON) and assets transferred to employees. They can also include statutory redundancy pay and payments linked to restrictive covenants. Holiday pay and unpaid wages fall onto the list too. Then there are company benefits. All these contain separate tax rules. Thus, you need to seek tax advice to make certain you are meeting your compliance obligations. They need separate consideration.
As for whether termination payments are taxable, this comes down to what they include. Some elements will class as earnings. As a result, they will be subject to Income Tax and National Insurance Contributions (NICs). Other termination payments get made on an employee’s death. These would be entirely exempt.
Payments surpassing £30,000
One fundamental rule is that termination payments only face taxation if they surpass £30,000. But, that only applies to ex-gratia compensation or redundancy. It also includes where you are compensating the worker for loss of office. So, it is vital to make an assumption that NICs and Income Tax might be due. Then, you should inspect each part of the termination package. This is to determine whether it will be eligible for the £30,000 exemption, or fully exempt.
You are unable to use the £30,000 exemption if another reason for the payment being made exists. This includes payments made in anticipation of retirement, or where a PILON is contractual. The same goes for any for services performed and/or bonuses. Also, there are payments for the introduction of a new restrictive covenant.
When the genuine termination payment exceeds £30,000, the excess might be subject to Income Tax. Additionally, there are NICs implications for employers if the amounts surpass £30,000.
Employers are responsible for ensuring termination payments get properly taxed. Usually, this happens through PAYE. Although, special reporting requirements apply with any exceeding £30,000. It can include non-cash elements.
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