Termination Payments – Changes to the tax treatment

posted by admin on August 21, 2018.

  • The Government has now confirmed the changes on how termination payments are taxed, and published draft legislation for comment.
  • The changes apply “from 6 April 2018“.

Key points are:

  • the existing £30,000 income tax exemption for redundancy termination payments will continue to apply, as will the unlimited exemption for employee national insurance contributions (“NICs”) (provided, as now, the payment is not “earnings”).  However, employers’ NICs will be due on any termination payment in excess of £30,000, making termination payments more costly for employers;
  • all PILONs (payment in lieu of notice) will now be taxed and subject to NI payments (irrespective of whether they are contractual or non-contractual).  In fact, any payment or benefit which the employee would have received during his notice period (had she/he worked it) will be subject to tax and NICs. Further details of how this provision will operate in practice are set out below;
  • the exemption for payments due to injury and disability will be retained, but will be amended so that it will not extend to injury to feelings unless the injury amounts to a “psychiatric injury or other recognised medical condition”;
  • foreign service relief will be withdrawn for all UK residents, the exception of seafarers.  UK residents whose employment ended after 6/4/2018 who receive a payment or benefit in connection with that termination made after 13 September 2017 will not be eligible for tax relief for any period of foreign service as part of that job.
  • Class 1A NIC employer charges on termination payments of more than £30,000 and on sporting testimonials of more than the £100,000 lifetime exemption had also been due to be included, but due to a delay in legislation, these are now due to come into effect in April 2019.
  • the other existing exemptions will remain, including payments made to tax exempt or registered pension schemes, and in respect of legal costs.1

1 Information provided by D L Piper UK LLP

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