Change in the Taxation of Termination Payments: Proposed Reforms.
Following a Report from the Office of Tax Simplification, last week the government published a Consultation paper on “Simplifying the Tax and National Insurance Treatment of Termination of Payments.”
Currently, the first £30,000 of non-contractual termination payments is free of income tax and national insurance. However, this £30,000 can often be made up of several different elements, and each part requires to be scrutinised in order to assess whether tax is due on each part. This, HMRC suggests, is complex and time consuming, and as such requires reform.
The government are considering the following proposals:
- Removing the distinction between contractual and non-contractual termination payments. This could mean, for example, that a PILON payment could also attract tax-free status;
- Aligning the tax and NIC treatment of termination payments fully; and
- Linking the tax-free exemption to the number of years of service the employee has completed;
- Only allowing a tax-free exemption in the event that the employment has been terminated in connection with a redundancy.
The Consultation paper does not set out exact rates and thresholds, but in one worked example, the paper suggests a tax free amount of £6,000 for the first 2 years of service, with a further £1,000 for every additional year of service after that, provided the termination was due to or in connection with redundancy.
The government are welcoming views from employers, representatives and employees on this issue until the 16 October 2015. If you have any queries, or would like to discuss anything raised in this article, please do not hesitate to contact Davidson Chalmers’ Employment Team, who will be happy to provide their advice and assistance.