What Employers Need to Know about UK Termination Payments

What Employers Need to Know about UK Termination Payments

In the United Kingdom, an employment termination payment is precisely what it sounds like: a single, lump sum payment that is made by an employer to an employee who has recently been terminated for a variety of reasons. But the implications of these payments are much broader.

The Types of Employer Termination Payments

Generally speaking, there are three key types of employer termination payments to be aware of. These include:

  • PILON, or "payment in lieu of notice." This is when an employee is paid a lump sum and terminated essentially at the same time, instead of receiving notice or the employee continuing to work through their own notice period.
  • Ex-gratia. These are payments that, by design, are free of any and all contractual obligations.These are often used in settlement agreements, as they can be paid without any admission of liability by the employer. This is also sometimes referred to as a "golden handshake" for that reason.
  • Redundancy payments. This is a payment that includes whatever amount to which an employee is entitled when their employment is ended for the specific reason of redundancy. It is calculated using the length of a person's employment, their weekly pay amount, and their age. None that this is subject to a cap, however, meaning that there is a maximum amount that someone can be paid out.

But What is a Termination Package?

A termination package, as the name suggests, is a particular type of settlement agreement that is made up of both contractual and non-contractual items. Some of those will be liable to income tax, while some of them won't be. For all items that are not chargeable as income tax, there is a tax threshold that as of 2018 is 30,000 GBP.

These taxes, too, have implications for the specific types of payments being made. Currently, they are:

  • The first 30,000 GBP of an ex-gratia termination payment is tax free, but everything thereafter is subject to tax
  • Statutory redundancy termination payments are absolutely tax free. Contractual redundancy termination payments, on the other hand, are subject to income tax on all amounts that are greater than that initial statutory payment
  • PILON termination payments are subject to new legislation, set by the government in April of 2018. Moving forward, all PILON payments, whether they are the result of a contractual right to be paid in lieu of notice or not, are taxed as general earnings. Because of that, they are subject to all income tax and national insurance contributions dictated by current law.

Concerning statutory redundancy pay, most employees are entitled to this if they've been working for their current employer for more than two years. They will get not only a half a week's pay for each full year that they were under 22-years-old, but one full week's pay for each year they were between 22- and 41-years-old. Finally, they will get a half a week's pay for each year after they turned 41. Currently, the length of service is capped at 20 years and if an employee was made redundant after April 6, 2018, the total amount of weekly pay is capped at £508. That means the maximum statutory redundancy pay is capped at £15,240.

On the subject of PILON termination payments, this is all made possible via the introduction of something called post-employment notice pay, otherwise referred to as PENP for short. Essentially, this concept taxes the basic pay an employee would have received had they worked their entire notice. In other words, it basically replaces non-contractual PILON termination payments altogether. There is a statutory formula used to calculate all post-employment notice payments, for example, which many find convoluted and difficult to follow.

The reasoning behind this action has to do with the government wanting taxes to apply to both contractual and non-contractual PILON termination payments. According to government representatives, this was done to make the entire process fair and transparent; they wanted it to be understood that all PILON payments, regardless of circumstance, will be treated as taxable earnings.

Expanding into the UK? Break into Your New Market with an Experienced Partner

Familiarizing yourself with both hiring and termination regulations before expanding into the UK is a must—and so is having a solid expansion plan. Whether you’re planning to hire a single employee in Manchester or you’re eyeing Edinburgh as a new branch location, expanding with an experienced partner makes all the difference. Velocity Global’s Employer of Record solution can have you up and running quickly and seamlessly—and saves you hefty costs when compared to traditional entity setup. Your new UK market is waiting. Let’s get you there.

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