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Important changes to taxation and National Insurance contributions of termination payments

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The Government has confirmed that the £30,000 tax free allowance on certain elements of termination payments is to be retained.

In the summer budget of 2015, the Government revealed an intention to review the tax and National Insurance contributions (NIC) treatment of termination payments arising at the end of employment, to make the system “simpler and fairer”.

The Government has now clarified what this will mean, in a Response to Consultation published this week. Despite speculation that the current £30,000 tax free allowance on certain elements of termination payments might be scrapped, the Government has confirmed its plans to keep it after all. However, from April 2018, certain payments will no longer fall within this allowance, a development which could signal significant change to current practice for employers and also the financial expectations of employees, on leaving.

Key Government proposals from April 2018 are that:

  • all payments in lieu of notice (both contractual and discretionary) will be taxable earnings and subject to tax and national insurance contributions (NIC);
  • all other post-employment payments which would have been subject to tax and NIC had an employee worked their notice will be similarly treated as taxable earnings (removing the opportunity to argue such payments are damages for breach of contract and should be included in the allowance);
  • Rules for income tax and employer NICs will be aligned, so that payments over £30,000 will attract NIC (which they currently do not);
  • Subject to the above, termination payments which are non-contractual will be tax and NIC exempt up to the amount of £30,000.

The aims of the reforms are to make the taxation of termination payments:

  • simpler for employees and employers to understand and operate;
  • clearer and more certain, so as not to add to the employee’s burden at a difficult time;
  • fairer (so that the fat cats who can afford advice don’t get better tax treatment than the lowly-paid); and
  • not unduly expensive for the Exchequer.

 Employers who have queries regarding the above should contact Sally Morris at or on 01905 734032.