For over 20 years, the position on payments in lieu of notice has been relatively clear. If the Pilon was a contractual one or based on customer practice it was generally taxable. If it was not in the contract or there was no customer practice to convert notice period into pay then it was treated as liquidated damages and therefore part of the termination payment.
After 21 years since the famous Thorn EMI case most people knew the position. But in order to “simplify”, HMRC decided that all Pilon taxes should be taxable from 6th April 2018. Of course, this simplification is nothing of the sort as you now have to work out what is the payment what should be treated as a Pilon, otherwise known as the post-employment-notice-pay. Alastair Friend has done a brilliant article on this in Tax Journal which goes through in detail the additional calculations now required to work out the taxability of the payment.
Needless to say, this change is never to the benefit of the taxpayer but always to the benefit of HMRC.
What I find most disturbing is however the fact that it will disproportionately affect more junior staff who are terminated. Senior staff will have termination payments which easily exceed £30,000 excluding the Pilon. Junior staff are less likely to have this level of payment and therefore will end up paying substantially greater amounts of tax.
A tax reform which complicates the system creates additional compliance burdens and disproportionately affects more junior staff does not appear to me to be a desirable change.
Jeremy is talking about the changes to termination payments at the CIOT conference on the 7th to 9th of September in Warwick.
