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Employment Tax Alert - Proposed Reforms to the Taxation of Termination Payments

Following on from the Government's consultation on the taxation of termination payments launched in July 2015, HM Revenue and Customs has recently issued a further consultation document, including draft legislation, with the aim of making the law surrounding termination payments much simpler and fairer.

What are the Key Changes?

The key changes that have been proposed are as follows:

• payments in lieu of notice will be taxable earnings and subject to income tax and national insurance contributions (NICs). This is irrespective of whether such payments are contractual or discretionary;

• all other post-employment payments, which would have been treated as general earnings if the employee had worked their notice period, will be subject to income tax and NICs;

• payments for injury to feelings will be subject to income tax (although payments made because an individual is prevented from working due to physical or psychological injury or disability will be exempt);

• foreign service relief will be removed; and

• all payments over £30,000 will attract employer's NICs.

What Remains?

The Government is committed to ensuring that:

• the first £30,000 of any termination payment remains exempt from income tax and NICs;

• any payment that relates solely to the termination will continue to enjoy an unlimited exemption from employees' NICs; and

• a number of the current exemptions will remain, including payments made into a registered pension scheme and certain legal costs incurred in relation to advice on the termination.

When Does this Happen?

In the event that the proposed reforms are approved, they will be introduced with effect from April 2018.

When Does the Consultation Period End?

The proposals remain subject to consultation and the draft legislation will remain open for comments made before 5 October 2016.

Our Conclusion

The £30,000 threshold was under threat of being reduced and so the Government's confirmation that this will remain, together with the unlimited employees' NICs exemption on termination payments and the retention of certain other exemptions, is to be welcomed.

However, the proposals are likely to mean that an employer's costs in terminating an employee's employment contract will increase. This will be particularly noticeable in relation to the employer's NIC charge on settlements above £30,000 which will increase an employer's costs by 13.8% (on current rates) and may be factored into the overall financial arrangements which are offered to a departing employee. This may lead to some senior departures being hastened prior to the changes coming into force in order to lessen the employer's overall costs.

Need Help on Employment Tax Matters?

If you need assistance with any employment tax matters, including tax advice on structuring termination payments and negotiating the tax aspects of settlement agreements, then please contact Simon Newsham at Newshams Tax Advisers on 020 3151 0650 or email him at
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