National insurance bill delay will not affect PILON changes, says expert

Out-Law News | 08 Nov 2017 | 10:06 am | 1 min. read

Changes to the income tax and national insurance position on payments in lieu of notice (PILONs) will still take effect from April 2018, even though the government has announced that the National Insurance Contributions Bill has been delayed and will take effect from April 2019, rather than April 2018, an expert has said.

The government had originally intended to apply national insurance contributions (NICs) from April 2018 to both ex gratia termination payments over £30,000 and to PILONs where there is no contractual entitlement. The legislation in relation to PILONs is contained in the Second Finance Bill of 2017, which has almost completed its progress through Parliament and so should come into force from April 2018.

However, the NIC changes for payments over £30,000 need to be introduced in social security legislation and so will be contained in the delayed National Insurance Contributions Bill, according to employment tax expert Chris Thomas at Pinsent Masons, the law firm behind   

"The delay is good news for employers in that it grants a temporary reprieve from the extra NICs cost that they will face on larger termination payments, but it is also liable to cause confusion and thereby further undermine the stated objective of simplifying the current system," Thomas said.

A PILON is a payment made to an employee when employment is terminated without giving the employee as much notice as he or she is entitled to under the contract, instead of the employee working through a notice period and receiving pay in the normal way. Under the current system PILONs which are provided for in a contract of employment are subject to income tax and NICs, but non-contractual PILONs are not.

The distinction between contractual and non-contractual PILONs will be removed from April 2018, meaning tax will be due on all payments equating to notice pay.

"This is a major change and expectations will need to be managed, both within the employer's business and also those of the departing employee who may expect to receive a gross payment based on previous practice," Chris Thomas said.

"This change also largely removes the benefit of not including PILON clauses in employment contracts, so employers who don't currently include these may wish to review their practice," he said.

In addition to the changes to termination payments in excess of £30,000, the National Insurance Contributions Bill will abolish Class 2 NICs on self-employed individuals. The government said that the bill would be delayed to allow time for it "to engage with interested parties and Parliamentarians with concerns relating to the impact of the abolition of Class 2 NICs on self-employed individuals with low profits".