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Wednesday, 7 September 2016

Proposals for reform of tax treatment of termination payments

The government has published a revised proposal, along with draft legislation, to reform the tax treatment of termination payments. This follows a consultation which opened in July last year.
The proposal will not restrict the present tax exemption to termination payments made in a reduundancy situation, as had been suggested. The tax-free threshold will be maintained at the current level (£30,000) and most of the current reliefs will also stay.
Termination payments above the threshold, which will be liable to income tax as at present, will also be liable to employer's National Insurance Contributions.
The draft legislation will retain the distinction between contractual and non-contractual payments, but any payment that the employee would have received had they worked their contractual notice period will be subject to income tax and NICs. All payments in lieu of notice will also be subject to income tax and NICs, regardless of how the settlement agreement characterises the payments.
Reliefs which apply to income tax on payments over £30,000 will be retained, with some modifications.
The result of the changes in the law will be a clash between the legislation and what the contract of employment might say. Employers will, in effect, have to consider what the employee would have been entitled to under the contract had they worked their full contractual notice period - but without regard to the terminationitself, or to any provisions restricting entitlement in the event of a termination.
Interested parties can comment until 5 October: the consultation document is here. The changes will come into operation in April 2018.

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