The Taxation of Termination Payments

October 27, 2016

The Taxation of Termination Payments

The Government has published its response to the 2015 consultation on the tax and National Insurance Contributions (NICs) treatment of termination payments as well as draft legislation implementing the planned changes.

The first £30,000 of a termination payment will remain exempt from Income Tax, and any payment made to any employee that relates solely to the termination of their employment will continue to have an unlimited employee NICs exemption. However, from April 2018, the Government intends to make the following changes:

  • To ensure that the £30,000 exemption cannot be abused, all payments in lieu of notice, whether they are contractual or non-contractual, will be fully taxable and subject to Class 1 NICs as earnings;
  • The rules for Income Tax and employer NICs will be aligned so that employer NICs will be payable on termination payments above £30,000. These are currently only subject to Income Tax; and
  • Foreign Service Relief in respect of termination payments is to be removed.

In addition, the legislation clarifies that the exemption for injury is not intended to apply to payments for injury to feelings. This amendment reflects what HM Revenue and Customs consider to be the correct interpretation of the existing legislation.