When an employee leaves their employment, there may be an agreement with the employer to make a termination payment to compensate them for their loss of employment, of which the first £30,000 of any non-contractual element is free of tax and National Insurance (NI) contributions. There can sometimes be a question as to what elements are contractual or not and, in light of this, the Government has started consulting on simplifying the tax treatment of these termination payments.
Amongst the proposals in the consultation paper issued by the Government on 26th July 2015 are:
- Removing the distinction between contractual and non-contractual payments, making all payments subject to tax and NI;
- Removing the fixed £30,000 blanket tax-free exemption and replacing it with a new exemption which increases proportionately with the number of years’ service the employee has completed – the example given in the consultation document is a £6,000 exemption for those who have attained 2 years’ service and then £1,000 for each year of employment thereafter;
- Limiting the right to the tax-free exemption to employees with 2 or more years service; and
- Having the exemption only apply to redundancies, and in some circumstances to unfair dismissal, wrongful dismissal and discrimination compensation, specifically excluding situations where a fixed term contract has come to an end at the end of its term.
As part of the consultation, the Government is asking to hear views from anyone who is affected by or interested in these proposals, including employers. More information, including the consultation document can be found here. Consultation closes on 16th October 2015.
The sharp-eyed amongst you will see that, whilst being trumpeted as a simplification measure, these proposals are at least as much about increasing the tax take from termination payments. The end result is likely to be that terminating employment may get more costly. We shall of course keep you updated as to any developments regarding this issue.
