Taxation of termination payments

What do we already know?

We updated you in our August 2015 Newsflash Termination payments that the Government had published a consultation, available here, on simplifying the tax and NICs treatment of termination payments.

We updated you in our March 2016 Newsletter Government reforms (2) Budget 2016 news that compulsory employers national insurance contributions (NICs) would be introduced from April 2018 on termination payments over £30,000.

What’s new?

The Government has published its response to its 2015 consultation on simplifying the taxation of termination payments along with new draft legislation, available here.

The response proposes several changes to the taxation of termination payments which, if approved, are due to come into force in April 2018. The changes have been proposed in a bid to make the treatment of termination payments simpler and fairer.

The main changes are as follows:

• payments over £30,000 will attract employer NICs (the current position is that termination payments above £30,000 are subject to income tax but not NICs);
• the £30,000 tax free allowance on certain aspects of termination payments is to be retained (a reduction on the £30,000 threshold was suggested but it was decided that this current threshold should be retained);
• all payments in lieu of notice will be taxable, whether contractual or non-contractual (at the moment contractual payments in lieu of notice are taxable, whereas non-contractual payments in lieu of notice are not); and
• payments for injury to feelings will be subject to tax.

The draft legislation is open for consultation until 5 October 2016.