Taxation of payments in lieu of notice

In the Finance Bill 2017, the government intends to implement its plans to tax all payments in lieu of notice.

There is currently a possible way around this if there was no payment in lieu of notice clause in the contract or the employer decided to breach the contract in refusing to pay notice. This would be subject to HMRC rulings and guidance of course, particularly in respect of the way the employer usually deals with such payments, and how they have approached this one.

Damages are not subject to national insurance and income tax up to the first £30,000, meaning that it was often to the advantage of employees and employers alike to pay notice by way of damages instead of in lieu of notice.

The government has been seeking to close this loophole and make all payments in lieu of notice taxable regardless of whether there has been any breach.

The loophole closing rules were in the Finance Bill 2017, but the election has got in the way of implementation. These measures will need to be implemented after the election, and may well be subject to further debate, although there are serious pressures on parliamentary time given the Brexit issue.

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