The
Inland Revenue has introduced new rules which will make it far harder for
employers to avoid tax and national insurance on severance payments.
It
has been possible to make severance payments tax free – usually up to £30,000 –
by using the ‘golden handshake’ provisions in the tax legislation.
The
law states that a severance payment made under a payment in lieu of notice
(Pilon) clause will be taxable and subject to national insurance contributions
(NIC). Where there is no clause or the employer chooses to breach the contract
and pay damages, it has been common practice to claim the golden handshake
provisions apply and that no NIC is payable.
However,
the IR’s new Statement of Practice on the tax treatment of severance payments
says it will now presume tax and NIC are due whenever a Pilon is made "as
an automatic response to a termination", even where the employer intends
to terminate the contract in breach and pay damages.
In
effect, where there is evidence of a ‘practice’ of making Pilons without giving
it much thought, they will be treated as taxable.
The
new regime is likely to lead to disputes between the IR and employers who
assume their severance payments fall within the golden handshake regime.
