Redundancy might cost more after April this year
Redundancy payments could be more expensive when tax changes are introduced in April. Businesses faced with making difficult redundancy decisions may not be aware that the tax rules applicable to redundancy payments are due to change. These changes could mean that redundancies made after April are more expensive for employers – and cost the redundant employees more in tax and national insurance (NI).
The new rule that will have the most impact in the short-term is that both contractual and non-contractual payments in lieu of notice (PILONs) will be taxable and subject to Class 1 NICs. Before April, non-contractual PILONs can be tax and NI free if they fall within the standard exemption threshold of £30,000.
There is no hard-and-fast rule governing whether a contract of employment will have a PILON clause. Some contracts give employers the opportunity to make an employee a payment equal to what they would have earned in their notice period and require them to cease working immediately. Others will stipulate a notice period but not give the employer the alternative of making a payment instead.
Until April, if there is no PILON clause in the contract and the employer and employee agree to terminate the employment immediately, and there is a payment in compensation for the breach of contract and for not allowing the employee to work their notice period, this is generally accepted. The payment is treated as part of the £30,000 tax-free termination payment exemption to which all employees are entitled.
Employers that may be anticipating making redundancies should make sure they understand the new rules as these changes could significantly increase the cost of making termination payments. While clearly not the government’s intention, making redundancies more expensive in tax and NI terms after April will encourage some employers to make their redundancies ahead of this date to keep their costs down.