Termination Payments

TERMINATION PAYMENTS - CHANGES TO THE TAX TREATMENT
Following its consultation in 2015, the Government has now confirmed the changes which will be made in how termination payments will be taxed, and published draft legislation for comment.
The changes will apply "from April 2018".  It is not clear at this stage whether payments pursuant to settlement agreements entered into before that time will be grandfathered under the existing legislation, but that may well be the case.


Key points are:
• the existing £30,000 income tax exemption for termination payments will continue to apply, as will the unlimited exemption for employee national insurance contributions ("NICs") (provided, as now, the payment is not "earnings").  However, employers' NICs will be due on any termination payment in excess of £30,000, making termination payments more costly for employers;
• all PILONs will now be taxed (irrespective of whether they are contractual or non-contractual).  In fact, any payment or benefit which the employee would have received during his notice period (had he worked it) will be subject to tax and NICs. Further details of how this provision will operate in practice are set out below;
• the exemption for payments due to injury and disability will be retained, but will be amended so that it will not extend to injury to feelings unless the injury amounts to a "psychiatric injury or other recognised medical condition";
• foreign service relief will be withdrawn.  This may raise some interesting questions, for example, about whether a payment to an employee who has worked outside the UK for several years but for a UK employer, will be caught;
• the other existing exemptions will remain, including payments made to tax exempt or registered pension schemes, and in respect of legal costs.
 

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