Following a recent consultation, the Office for Tax Simplification (OTS) is currently consulting on proposed changes to the tax and National Insurance Contributions (NICs) treatment of termination payments.
The current rules governing termination payments are complex and are sometimes open to manipulation by employers to take advantage of the employer NIC exemption in particular. Employers sometimes attempt to change the nature of payments so that they effectively become exempt termination payments, where strictly, they should be charged to tax and NICs.
The proposed changes are therefore designed to provide certainty for employers and employees, whilst being fair, simple to implement, and not open to abuse or manipulation. At present, the government is proposing the following changes, which if enacted, will take effect from April 2018:
- the first £30,000 of a termination payment will remain 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.
- the scope of the exemption for termination payments will be clarified to prevent manipulation by making the tax and NICs consequences of all post-employment payments consistent. In order to achieve this, tax and Class 1 NICs will be payable on 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.
- the rules for income tax and employer NICs will be aligned so that employer NICs will be payable on payments above £30,000 (which are currently only subject to income tax).
- the following changes will also be made to the exemptions for termination payments:
- removal of foreign service relief; and
- clarification that the exemption for injury does not apply in cases of injured feelings because of the divergence of judicial decisions about this issue.
The government’s consultation response document and the draft legislation can be found online here.