On 6th April 2018 the publicised changes to the treatment of notice under settlement agreements come into force. At present the tax treatment of a payment in lieu of notice depends on whether the contract has the right to pay in lieu of notice in which case notice must be taxed. If there is no such clause in your contract of employment but notice is always paid as a custom and practice then this should also be subject to tax. If not then the notice can come within the £30,000 tax free threshold.
With effect from 6th April 2018 all payments in respect of notice must be subject to both tax and class 1 national insurance contributions. It is therefore important that the agreement expressly deals with notice. Any notice payment should be separated out and taxed as earnings and the remaining sums left to benefit from the £30,000 exemption. Where no notice is given or stated then this will still need to be dealt with as there will be the basic presumption that the pay you would have earned has you worked your notice should be taxed as earnings. It will not be as simple as stating that the termination is without notice as the notional sum is likely to be subject to tax and giving a tax indemnity under the agreement may leave you with a large tax bill later.
At the same time the Government is abolishing any foreign service relief for UK resident employees but such relief was rare in any event.
Further changes are on the horizon in April 2019 but this time for employers who will need to pay class 1A national insurance contributions on all termination payments over the £30,000 threshold.