Tax-free Payments In Lieu Of Notice terminated

By Toby Lester | 8th February 2018 | 10 min read



HMRC have released a new version of their Self-Assessment Exclusions for individuals. These are a list of scenarios that the HMRC system cannot cope with or will not calculate the correct tax liability for and therefore there is an exclusion in place to allow for these returns to be submitted by post instead of online. 
HMRC have advised us that all Self-Assessment taxpayers need to file their 2016/17 Tax Return, pay their balance and make their first payment on account for 2017/18 by 31 January 2018. 
They have confirmed that a “small number” of taxpayers are affected by the exclusions and therefore unable to file online or get an accurate income tax liability calculation for 2016/17. Their forecasts suggest that the exclusions for 2016/17 will only impact “a very small proportion of SA customers (a fraction of 1%)”.
In these instances taxpayers (or their agents) should:
File a paper return, along with a completed reasonable excuse claim
Make a reasonable effort to estimate the income tax liability based on the information they have
Pay the estimated balance for 2016/17 and make their first payment on account of 2017/18 by 31 January 2018
Should the tax liability calculation for 2016/17 be too low or the deadline of 31 January 2018 be missed because of an exclusion, HMRC will not apply late filing, late payment penalties and/or interest. Automatic issue of these can be cancelled by a reasonable excuse claim. 
From February 2018 HMRC will contact “customers” and their agents where they feel that the tax calculation needs to be corrected to confirm their actual income tax liability. 
If you are uncertain as to whether or not your client’s circumstances match an HMRC exclusion and IRIS allows you to submit your client’s tax return online you should still file the return online, and pay the tax liability due. 
HMRC have stated that they will:
Identify any cases filed online where the calculation is incorrect
Make any required correction to the income tax liability 
Inform the customer of the correct liability 
Advise when the revised amounts need to be paid
Inform the customer that they will not have to pay late payment penalties and/or interest attributable to any additional amount arising from the correction if it is paid before the revised due date
In most cases, if your client’s circumstances fall into one of the HMRC Exclusions the IRIS software will warn you and advise that the Return be sent by post. There are some scenarios, only recently highlighted by HMRC that the software will not warn you about, but the Return will be rejected online with a 6492 error. In these circumstances the return should be sent by post accompanied by a reasonable excuse claim.

Tax-free PILONs terminated

The tax rules governing ‘termination payments’ or Payments in Lieu of Notice (PILONs) have always been complex and an area of contention in some cases. This has particularly been so in recent years, where there has been scope for employers to manipulate the rules by structuring arrangements to include payments that would ordinarily be taxable, in order to minimise the income tax and National Insurance due. One of the main areas of concern has been whether the well-known £30,000 tax-free exemption applies to a payment. However, things are set to change from April 2018, when a series of reforms are brought into play – all designed to make everything clearer and fairer! 


As things currently stand, when an employee receives a payment in lieu of notice, it is necessary to look at whether he or she has a contractual right to that payment – in general terms, if a contractual right exists, it will be fully taxable as earnings. It is this ‘contractual right’ element that has provided a degree of scope for manipulating arrangements to take payments outside the taxable earnings boundaries - and in doing so, for potentially escaping the charges to tax and NICs. In an attempt to level up the playing field, from April 2018, all PILONs, rather than just contractual PILONs, will be treated as taxable earnings. Therefore, under the new rules, all employees will pay tax and Class 1 NICs on the amount of basic pay that they would have received if they had worked their notice in full, even if they are not paid a contractual PILON. 

This change means that the tax and NICs consequences should be the same for everyone - it will no longer depend on how an employment contract is drafted, or whether payments are structured in some other form, such as damages for example.

Genuine termination payments

Whilst the existing £30,000 income tax exemption for terminations payment remains in place, it should be noted that from April 2018 the National Insurance Contributions rules will become aligned with the tax rules, which means that employer NI contributions will be payable on the elements of the termination payment exceeding £30,000. This could prove costly to some employers and they should be advised accordingly.

Additionally, although the existing £30,000 exemption will remain intact, the circumstances in which the exemption can be applied will, in essence, be restricted to genuine redundancy situations. This means that the whole subject of termination payments is likely to remain a contentious area for tax and NIC purposes, and clients should be recommended to seek prior advice where possible. 

Looking ahead

As with most anti-avoidance measures, HMRC will be closely monitoring how the reforms are operated. If perceived misuse of the rules becomes apparent, we are likely to see further changes being made. For instance, when the changes were originally announced in the 2017 Spring Budget, the government also advised that a new power will allow the Treasury to move the £30,000 exemption threshold upwards or downwards.