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Proposals in relation to the tax treatment of termination payments are set to take effect from April 2018. HMRC is currently consulting about the draft legislation which is to underpin the reforms.
Under the proposed new system, the first £30,000 of any payments resulting from termination of employment will remain exempt from income tax. In addition, termination payments will continue to have unlimited exemption from employee national insurance contributions (NICs).
Notable changes include the payment of employer NICs on payments above the £30,000 threshold (which are currently exempt). Notice payments are also to be subjected to income tax and NICs in all cases where payment is made in lieu of all or part of the notice period. This is aimed at removing any ambiguity under the current system where non-contractual payments in lieu of notice create a slightly grey area in terms of tax.
Any payments which are made towards injury to feelings will also subject to tax under the new system thus removing the current uncertainty over this type of payment.
The proposals are intended to strike a balance between supporting those who lose their job and safeguarding against abuse of the £30,000 exemption.
The consultation closes on 5 October 2016 and can be viewed here.