Tuesday 28 July 2015

Consultation on Simplifying Tax Treatment of Termination Payments

This is boring but important.

The government is consulting on simplifying the tax treatment of termination payments.

At the moment, the first £30,000 of any non-contractual termination payment is free of tax and national insurance.

The government is considering:-
  • removing the distinction between contractual and non-contractual payments (so that, eg, a PILON payment would also attract tax-free status)
  • changing the fixed £30,000 tax-free sum to an amount which increases the longer an employee has worked
  • introducing a two year qualifying period, so no employee can receive a tax-free termination payment unless they have been working for two years
  • making injury to feelings awards (which are arguably - albeit subject to inconsistent caselaw - completely tax free) subject to tax for some or all of the award.

Although the consultation document does not specifically set out amounts or thresholds, a worked hypothetical suggests a £6,000 tax-free sum after two years' employment, increasing by £1,000 for each additional year of employment. If this is the sort of level eventually implemented, it will mean a significantly reduced tax-free sum being available for almost all employees when their employment terminates.

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