News Updates

Tax treatment of termination payments

Wednesday 17th August 2016

The Government has published its response to consultation on the tax treatment of termination payments. The stated aim is provide support to those who lose their jobs, to simplify the rules, provide certainty, fairness and limit abuse or manipulation.

The draft legislation proposes the following changes:

  • Any payment in lieu of notice (whether contractual or otherwise) will be subject to tax and class 1 NICs.

  • Termination payments above the £30,000 tax free threshold will be subject to employer NICs as well as income tax.

  • The abolition of foreign service relief. This currently allows termination payments to be paid entirely tax free to those employees who have worked for their employer outside of the UK for more than 75 per cent of the last 20 years. Where an employee does not meet this threshold, but has worked overseas they are currently eligible for pro-rated relief.

  • Confirmation that the tax exemption for termination payments (including the amount over £30,000) resulting from death, disability or injury to an employee does not apply to injury to feelings awards, an aspect which is the subject of contradictory decisions from the Upper Tribunal (Tax Chamber) and the EAT.

The Government’s response confirms that the first £30,000 of a termination payment will remain tax free and any payment paid to an employee that relates solely to the termination of the employment will remain exempt from employee NICs.

The draft legislation can be viewed online:

Responses are invited by 5 October 2016 and the legislation is expected to be implemented in April 2018.

All information in this update is intended for general guidance only and is not intended to be comprehensive, or to provide legal advice.