Tax and NICs Treatment of Termination Payments: Government Response to Consultation


2 mins

Posted on 15 Aug 2016

The Government has issued its response to its consultation on simplifying the tax and National Insurance treatment of termination payments. 

The Government has confirmed that from April 2018:

  • The £30,000 income tax and National Insurance Contribution (NIC) exemption for termination payments will remain unchanged, so the first £30,000 of a termination payment will not be subject to income tax or employer or employee NICs;
  • Payments in lieu of notice, whether provided for in the contract or not, will not count as termination payments (and will instead be treated as earnings), meaning that they will always be subject to income tax and employer and employee NICs; 
  • Any other payment that the employee would have received if they had worked their notice will be subject to income tax and NICs, even if the employee is asked to leave employment immediately or part way through their notice period;
  • Termination payments which exceed £30,000 will be subject to income tax and employer (but not employee) NICs on the excess over £30,000 (currently termination payments are not subject to employer NICs at all); 
  • The exemption for payments for injury or disability will be retained, but legislation will expressly provide that payments for injury to feelings do not fall within that exemption, unless the injury amounts to a psychiatric injury or other recognised medical condition. This is intended to put an end to the current difference of opinion between HMRC and the Employment Appeal Tribunal on whether payments for injury to feelings made on termination in cases of discrimination fall within this exemption; 
  • The exemption for legal costs will be retained; 
  • The foreign service exemption will be abolished, except in relation to seefarers.

The Government has also provided draft legislation for consultation. Responses are required by 5 October 2016. 

These changes accord with and expand on the Chancellor’s March 2016 Budget announcement. Employers and employees will welcome the Government’s confirmation that a number of proposals considered in the consultation will not be taken forward. These include varying the amount of the exemption depending on the employee's length of service and limiting the exemption to termination payments made in cases of redundancy.

Simplification of the tax and National Insurance treatment of termination payments: government response and consultation on draft legislation.

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