Only if you need to, of course…
We are advising clients that if they are considering making changes to their senior team that may lead to expensive severance deals, then they should make those changes now if they hope to make use of the current tax regime.
Upcoming changes to tax rules will make it more expensive to agree severance deals with departing executives and employees, particularly those with higher salaries and large severance packages, from 6 April 2018.
The most significant change will take away the ability of businesses to make tax free payments in lieu of notice (“PILONs”). Up to now, it has been possible to pay tax-free PILONs if there is no contractual PILON clause in an individual’s service agreement or contract of employment (up to a limit of £30,000), and this is often used to reach a “win win” deal on a severance package with a high paid departing employee.
Because of this change, all PILON sums (including those paid under a settlement agreement) will be subject to income tax and NICs on the basic pay element, in the same way as they would have if the full notice period had been worked. This will impact upon severance deals for executives and employees with a termination date on or after 6 April 2018. In short, severance deals will become more expensive for employers.
Another notable change (although this is only due to take effect from April 2019) is that employers will also be required to pay employer’s NICs on any part of a “Termination Payment” (i.e. the severance payment above the PILON) that exceeds a £30,000 threshold. Previously, although income tax was due (and to be deducted) on these sums, employers NICs were not payable. This also includes termination payments to officers such as non-executive directors.
Although we have focussed on the issue of high value severance packages, the principle also applies to organisation-wide restructures.
There are also other changes coming into force at the same time, for instance “non-statutory contractual redundancy payments” will no longer automatically fall within the £30,000 exemption, although “Statutory Redundancy Payments” still do. We recommend that businesses take tax advice (from an appropriately qualified accountant) in relation to all proposed severance payment arrangements taking effect after the start of April 2018, at least until they get used to the new regime.
Businesses have a window of opportunity, between now and the start of April 2018, to make the changes that they have been thinking about. After that time, negotiations with departing senior executives, in particular, will need to be approached in a different way.
Finally, as there is now no tax benefit to businesses excluding PILONs from their standard service agreements and employment contracts; they should (at some point) reconsider the pros and cons of whether contractual PILON clauses would in fact be useful to them.