Termination payments: what does the future hold under the new rules?

The new rules regarding termination payments were first announced in the summer of 2015 when HMRC released a consultation paper. The scope of the consultation document was wide and sought views on a number of topics. Here, we take a look at the document and the changes it introduced.
HMRC’s consultation document discussed:  
  • The distinction between contractual and non-contractual termination payments and whether this should be removed;
  • The Income Tax and National Insurance treatment of payments and whether these should be aligned;
  • The possible replacement of the well-known £30,000 exemption; and
  • Whether the exemptions available on the termination of employment should be retained.
What’s new?
Following the consultation, it was announced in the 2016 Budget that some changes would be implemented. This was to include clarifying the scope of exemption, the removal of Foreign Service Relief  and confirming that the exemption for injury does not qualify for injured feelings.

A new concept of ‘post-employment notice pay’ will be introduced from 6 April 2018. This is effectively the normal pay an employee would have received during the notice period had the employment not been terminated and is subject to a new specific formula.

The well-known £30,000 exemption will be retained to some extent, but the scope of the exemption will be reduced. The new rules, which apply from 6 April 2018, will bring termination payments into tax charge when they would have previously qualified for the exemption.

The changes to the taxation of termination payments remains a particularly complex area of tax legislation because a termination payment often comprises a number of different types of payment, each with its own tax effects. If you are negotiating the terms of a termination payment with your employee or employer you should ensure that any package is reviewed from a tax perspective.

This article was taken from the Winter 2017 issue of the Private Client team's Quarterly Tax Digest. You can access all the other articles here.
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