Settlement Agreements – Taxation of notice pay from 6 April 2018

From 6 April 2018 the law relating to the taxation treatment of termination payments is changing.

The law remains that any part of a termination payment relating to sums due under the contract of employment will be subject to deductions by the employer for income tax and national insurance contributions. However now added to this will be any payment which is deemed to relate to the employee’s notice period. Where on termination an employer does not give to the employee the minimum notice period they are required to under their contract or statute, a calculation of the additional period of notice which should have been provided needs to be made, and the equivalent pay for this period will be deducted from the termination payment and subject to deductions.

Parties cannot agree to waive notice or pay in lieu of notice and it is the employer’s responsibility to make the necessary deductions. This is likely to have a significant impact on the amount received by an employee under a termination agreement, and needs to be kept in mind during settlement negotiations. Schools can seek further advice by contacting the ELS helpline.