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From April 2018 the tax treatment of wages payment to employees who are leaving is about to change.
Currently, contractual wages payments in lieu of notice are subject to tax and National Insurance (NI) deductions, however in the absence of a contractual right to make a payment in lieu of notice, such a payment is generally regarded as damages for breach of contract, and can be paid without deduction of tax up to the £30,000 threshold.
However, any part of a termination payment paid on or after 6 April 2018, which represents ‘post employment notice pay’, will not benefit from the current £30,000 exemption.
If an employee is not required to work their full notice (for whatever reason) HMRC will assume that an element of any termination payment includes notice pay and will classify it as ‘post employment notice pay’ which shall be treated as earnings and subject to tax and NI deductions.
This is a fundamental change in the treatment of termination payments and care will be needed to ensure employers do not find themselves with unexpected liabilities once employees have left their employment. For help on this or any payroll issues call us today on 0345 177 5500 or contact us on line.