Government Consults on Taxing Termination Payments


2 mins

Posted on 27 Jul 2015

On 24 July 2015, the Government launched a consultation on simplifying the tax and NICs treatment for termination payments. It wants to create a regime which is easy for employers to administer, for employees to understand and which creates certainty about the tax and NICs treatment of termination payments. 

The consultation follows on from recommendations of the Office for Tax Simplification ("OTS") last August, which included a recommendation that the current £30,000 exemption be replaced with a new income tax relief available only to employees who qualify for a statutory redundancy payment.

The Government:

  • proposes to remove the distinction between contractual and non-contractual termination payments. All payments would be treated as earnings and subject to income tax and NICs (both employer and employee). As a result, all payments in lieu of notice would be taxed in the same way; 
  • proposes to introduce a new exemption from income tax and NICs on termination payments. One approach being considered is that the exemption would increase proportionately according to length of service. It would only be available once an employee has completed two years’ service (with the same or an associated employer and including any change of employer under TUPE). This would mean that anyone who receives a termination payment after completing two years’ service would not have to pay tax on some, or possibly all, of their award, depending the size of the payment;
  • is considering limiting the exemption to termination payments made on redundancy (including voluntary redundancy), as defined in the Employment Rights Act 1996. If this proposal were implemented, it would also introduce two further exemptions for payments for unfair and wrongful dismissal and payments for compensation for loss of future earnings following discrimination; 
  • proposes to retain the existing exemptions for injury or disability; and
  • proposes to remove the foreign service exemption.

The Government also acknowledged that there is force in the OTS suggestion that the tax and NICs treatment of termination payments be aligned and seeks views on this. 

The consultation can be viewed here and closes on 16 October 2015. The Government expects to announce its decision as part of the 2015 Autumn Statement. 

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