UK and International Tax news
Tax Treatment Of Termination Payments Update
Monday 12th September 2016
HMRC has recently published a follow up document on its earlier 2015 consultation, the responses received and draft legislation.
The July 2015 consultation considered the tax and NIC treatment of termination payments and the objectives that the tax system should continue to provide support to those who lose their job, the rules should provide certainty for employees and employers, the rules should be simple, the complexity that the OTS highlighted in their report should be taken into consideration, and the rules should be fair and not open to abuse or manipulation.
The rules governing the taxation of termination payments are complex and the Government considers that they can encourage manipulation by employers to take advantage of the employer NICs exemption. Employers can, in some circumstances, change the nature of some payments so that they become termination payments, including remuneration such as bonuses which would normally be subject to tax and NICs.
To meet these objectives, the Government announced in the 2016 Budget that it would make changes to the taxation of termination payments. From April 2018, the government will continue to support individuals when they lose their job by ensuring that the first £30,000 of a termination payment remains exempt from income tax, and any payment paid to any employee that relates solely to the termination of the employment will continue to have an unlimited employee NICs exemption.
In addition, it will clarify the scope of the exemption for termination payments to prevent manipulation by making the tax and NICs consequences of all post-employment payments consistent. In order to achieve this, the Government will tax and subject to Class 1 NICs any payment that the employee would have received it they had worked their notice period, even if the employee is asked to leave employment immediately or part way through their notice period. This will also remove the confusion about the different rules for payments in lieu of notice (PILONs) by making all PILONs taxable and subject to Class 1 NICs.
It will also align the rules for income tax and employer NICs so that employer NICs will be payable on payments above £30,000 which are currently only subject to income tax.
There will be changes to the exemptions for termination payments including removing foreign service relief and clarifying the exemption for injury which will not apply in cases of injured feelings because of the divergence of judicial decisions about this issue.
Part 2 of the latest consultation document sets out the Government’s response to the July 2015 consultation and explains in more detail how the Government has decided to change the rules with effect from April 2018.
Part 3 and Annex A contains examples to illustrate how the new legislation is intended to work and includes questions about the draft legislation.
Annex B provides a full summary of responses.
This consultation runs to 4 October 2016.
If you would like further information on the consultation, please contact Keith Rushen on 0207 486 2378.
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