• Edinburgh: 0131 625 9191
  • Glasgow: 0141 428 3258
  • Galashiels: 01896 550991
Tax payments

Change in the Taxation of Termination Payments: Proposed Reforms.

Date: 29/07/2015 | Corporate, Employment & HR

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.

The matter in this publication is based on our current understanding of the law.  The information provides only an overview of the law in force at the date hereof and has been produced for general information purposes only. Professional advice should always be sought before taking any action in reliance of the information. Accordingly, Davidson Chalmers LLP does not take any responsibility for losses incurred by any person through acting or failing to act on the basis of anything contained in this publication.

Latest Updates

Want to get even more insight from Davidson Chalmers Stewart?

Keep your organisation up to date with the latest opportunities and changes in commercial law with regular insight and updates from the experts at Davidson Chalmers Stewart.

Let's Talk

A typical law firm? Not really. But a partner for the people and businesses we work with? Absolutely.

Our determination to do things a better way is nothing without our clients. So if you like what you see and think we’d make a good team, let’s talk. Pick up the phone and call us direct or make specific enquiries to our individual email addresses across the website. Alternatively use the form to submit general questions and comments.

Either way, we’ll get the message.


t0131 625 9191


t0141 428 3258


t01896 550991

Let's Talk form