If you have ever been involved in the negotiation of a settlement agreement, you will probably be aware of the sort of tax issues that can arise. 

Until now, in simple terms, any payments to which the employee is contractually entitled have normally be taxable.  This covers things like wages, holiday pay, bonuses and the like.  By contrast, if the employee receives a sum purely as compensation for the termination of their employment, then this payment can normally be paid tax-free (as long as it does not exceed £30,000).  Most redundancy payments fall into this category, as do many other compensation payments made under settlement agreements.

Although most payments can readily be allocated to one category or the other, some difficult issues have arisen in relation to the tax treatment of payments in lieu of notice (PILONs).  Depending on a careful consideration of the terms of the employee’s contract of employment, some PILONs are taxable and some are not.

The new regime

In an effort to ‘simplify’ the law (and, unsurprisingly, recover a bit more tax), the rules are going to change in relation to termination payments made on or after 6 April 2018, which relate to any termination of employment occurring on or after that date.  In broad terms, all PILONs are likely to taxable, regardless of the terms of the employee’s contract of employment.

Do you need to act now?

Given this imminent change in the law, in some cases, it may be particularly advantageous to initiate and finalise settlement agreement negotiations before the end of the current tax year.  If you think you might benefit from completing a settlement agreement before the tax laws change, please get in touch.