Proposed Changes to Tax Treatment of Termination Payments

Louise Walker
Legal Director
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The government is considering how it can make the tax and national insurance contributions treatment of termination payments ‘simpler and fairer’. It launched a consultation on 24 July 2015 in this regard.

Proposals include removing distinctions between types of payment, replacing the current £30,000 allowance with an exemption for redundancy (voluntary or compulsory) at a rate rising in line with length of service, new exemptions for wrongful dismissal, unfair dismissal or discrimination, retaining existing illness, disability and armed forces exemptions, and introducing new anti-avoidance provisions. The government also seeks views on possible alignment of income tax and NICs rules.

It is too early to say exactly what format any changes to the law will take, but there is a reasonable likelihood that in many cases, the total amount that can be offered tax-free under a termination payment will be rather less than the current limit of £30,000. On a more positive note, the proposal to simplify the tax treatment of payments in lieu of notice is likely to be welcomed by many employers.

You can find out more about the consultation here:

https://www.gov.uk/government/consultations/simplification-of-the-tax-and-national-insurance-treatment-of-termination-payments