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Tax on employment termination payments to change, but £30,000 exemption survives

In good news for many employers, HMRC have confirmed following consultation that the £30,000 tax exemption which applies to termination payments for…

In good news for many employers, HMRC have confirmed following consultation that the £30,000 tax exemption which applies to termination payments for loss of employment will survive. However, within the proposed changes to the law (which are subject to further consultation) some elements of the taxation of termination payments will be changing and these are likely to add to the cost of many severance payments. 

The detail

The key points of the HMRC’s proposals are as follows: 

  • The first £30,000 of a termination payment for loss of employment will remain exempt from income tax (subject to the same limits as currently apply);
     
  • Such termination payments will also continue to be exempt from employee NIC’s, and any excess over £30,000 will also still be exempt. However employer NIC contributions will be payable on payments over £30,000 (which are currently only subject to income tax);
     
  • The current difference in tax treatment between contractual PILONs (clauses which entitle an employer to pay an employee in lieu of notice) and payments in lieu of notice paid without such a provision, is to be abolished. All employers will have to deduct income tax and pay NIC contributions on pay in lieu of  notice (or a sum equivalent to it) if an employee is asked to leave immediately or part way through their notice period, irrespective of what is in the contract; and  
     
  • The current argument about whether injury to feelings payments/awards arising from the termination of employment can be paid free of tax under the broader personal injury exemption will be resolved, with the clarification that injury to feelings awards or amounts paid referable to injury to feelings and termination are taxable (save where they otherwise fall within the £30,000 exemption). 

What does this mean for me?

These changes are only proposed to take effect from April 2018, so for now the taxation of current severance payments does not change. The proposed legal changes are out for consultation until the 5 October, so if you have any strong views about what is proposed you are able to respond. However, once implemented, these changes will mean that: some of you will need to alter how you tax pay in lieu of notice; and employer NICs will increase the costs of severance payments.  Positively the £30,000 exemption, which had been thought to be at risk, has been retained and at its current level, meaning that most redundancy payments and many severance payments can be agreed and paid on a tax effective basis.                

Comment

These changes may mean that you want to revisit what your contracts say about notice, if you do not currently have PILON provisions in your contract. Do talk to us if that might apply to you. What is confirmed in this alert is a very brief summary of a very complex area and does not refer to all of the rules and exemptions which apply to the £30,000 tax free element. 

If you are intending to make any severance payments please do speak to your usual contact in the Weightmans Employment, Pensions and Immigration team or Phil Allen on phil.allen@weightmans.com, or our tax expert Haydn Rogan haydn.rogan@weightmans.com.