Simplification of the tax and National Insurance treatment of termination payments

The government has analysed the responses to its consultation on termination payments held in summer 2015 and has set out its response.

The government announced at Budget 2016 that it would make changes to the taxation of termination payments.

The changes include:

clarifying the scope of the exemption for termination payments to prevent manipulation, by making the tax and National Insurance contributions (NICs) consequences of all post-employment payments consistent aligning the rules for income tax and employer NICs so that employer NICs will be payable on payments above £30,000 (which are currently only subject to income tax) removing foreign service relief clarifying that the exemption for injury does not apply in cases of injured feelings

Consultation on draft legislation

The rules governing the taxation of termination payments are complex and can encourage manipulation by employers to take advantage of the employer NICs exemption. This is because employers can, in some circumstances, change the nature of some payments so that they become termination payments, including remuneration such as bonuses which would normally be subject to tax and NICs.

The government has several objectives for the tax and NICs rules on termination payments: the tax system should continue to provide support to those who lose their job; the rules should provide certainty for employees and employers; the rules should be simple; the complexity that the Office of Tax Simplification (OTS) highlighted in their report should be taken into consideration; and the rules should be fair and not open to abuse or manipulation.

The government has published a follow-up consultation on draft legislation, which explains the policy underpinning the changes in greater depth.

Simplification of the tax and National Insurance treatment of termination payments - consultation on draft legislation document can be found here.

The draft legislation is intended to give effect to the changes, and the government invites views on whether this objective is achieved.

The government is interested in hearing from everyone with a view on this subject, including employers, their representatives, trade organisations and any other interested parties.

The closing date for comments: 5 October 2016

Comment

It is good to see this simplification process progressing steadily with the intention of the legislation becoming effective from 6 April 2017.

Termination payments are one of the most complex areas in payroll with very conflicting advice commonly being given.