The draft UK Finance Bill 2017 (the “Bill”) proposes some significant changes to the tax treatment of a payment in lieu of notice (“PILON”) for employees.  Where a UK employer exercises a contractual right to make a PILON, the payment is fully taxable and subject to national insurance contributions (“NICs”) as income, in the same way as salary.  However, where there is no contractual right to make a PILON, and the employer chooses to terminate the employee’s contract in lieu of notice, any payment made to the employee to cover the amount that they would have received if they had worked their notice in full constitutes damages for breach of contract. Such payment could therefore be paid free of tax up to £30,000, and free of both employer and employee NICs.

The Bill proposes that, from April 6, 2018, all PILONs (contractual and non-contractual) will be taxed as income, and will therefore be subject to income tax and both employer and employee NICs. This would apply only to the basic pay that the employee would have earned during this period.

In addition, any amounts in excess of the £30,000 tax exemption are currently subject to income tax, but not to any NICs. The UK government has proposed to subject such excess to employer (but not employee) NICs. If passed, this provision would take effect from April 2019.

Although the Bill is only in draft form currently (and its scope subject to change between now and April 2018), UK employers should carefully consider any proposed terminations that may be made after April 6, 2018, in order to minimise any potential tax liabilities that could arise for both the employer and the employee.

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Photo of Antonio Michaelides Antonio Michaelides

Antonio Michaelides advises clients in heavily regulated sectors on a broad range of cross-border regulatory and compliance matters, with a particular focus on Europe and the Middle East. He has particular expertise in helping clients navigate international HR-legal compliance issues—including labor laws, international…

Antonio Michaelides advises clients in heavily regulated sectors on a broad range of cross-border regulatory and compliance matters, with a particular focus on Europe and the Middle East. He has particular expertise in helping clients navigate international HR-legal compliance issues—including labor laws, international equity compliance and immigration matters—and frequently helps multinationals find solutions to their most complex global employment and benefits challenges.

Antonio is a member of our Global Workforce Solutions team, which brings together various practice areas to provide the employment, employee benefits, tax, immigration and other advice required in these complex situations, and advises clients across a range of industries on both larger strategic projects arising out of company restructures and global mobility arrangements, and day-to-day HR-legal matters.

Antonio has extensive experience with government affairs and regulatory matters in the Middle East—advising government entities, as well as private companies, on a variety of regulatory infrastructure and compliance issues. He previously advised free zone authorities in the Emirate of Dubai on employment and immigration matters, including amendments to the DIFC Employment Law and the application of the DMCC Employment Regulations, and is currently advising on the development of legal and regulatory infrastructure for a number of government-led projects in Saudi Arabia.

Given his EU law expertise, particularly in the areas of free movement of people and establishment, Antonio is a member of the firm’s Brexit Taskforce which is advising a range of clients on the impact and implications of Brexit.

Clients appreciate his responsiveness and business-focused advice, and benefit from his cultural awareness and extensive language skills in the context of managing international projects.

In addition, Antonio has presented, and provided training, to clients and external organizations on the challenges of international assignment management and other common global mobility issues.