Tax free severance payments for some
It is probably fair to say that one of the best known parts of our tax legislation allows employees being made redundant to receive up to £30,000 compensation, free of both tax and national insurance.
It is equally fair to say that the Revenue are far from keen on this and will find any legitimate reason they can to charge income tax on the payment. One of their main weapons in this is the so-called pay in lieu of notice (“PILON”) clause in an employment contract; if an employee is entitled to receive pay in lieu of notice, this payment is contractual (and hence taxable) rather than compensation (which would be exempt from tax up to £30,000).
Unlike the rest of us, MPs have been entitled to receive termination payments free of tax, even if the payments are made in accordance with a PILON clause in their contract, for some years.
This year’s Budget has extended this exemption to the Mayor of London and members of the Greater London Assembly.
So, when Ken Livingstone handed over the keys to City Hall to Boris Johnson at least he had the consolation of knowing that his pay off would not suffer tax.
