Consultation on the future of Tax on Termination Payments

31st August 2015

$0TheGovernment is consulting on proposals to simplify the tax treatment of terminationpayments.$0$0Sincethe late 1980s employers have been able to make non-contractual terminationpayments of up to £30,000 free of tax and National insurance.$0$0In viewof the fact that the figure of £30,000 significantly exceeds the average awardfor unfair dismissal made by the Employment Tribunals the tax free limit of£30,000 has proved to be attractive, and a major help in individuals reachingsettlements with employers on the termination of their employment.$0$0However,a major concern with the tax-free limit is the fact that it has failed to keepup with the increases in average salaries. Nevertheless, enabling an individualto leave with the first £30,000 of compensation being tax-free has eased theroute to settlement in a very large number of cases for many years.$0$0TheGovernment is now consulting over proposals to change the current tax treatmentof termination payments. However, rather than increase the tax-free amount available,the proposals being suggested look like the amount that can be paid free of taxwill (in most cases) be significantly reduced.$0$0The proposalsinclude removing the distinction between contractual and non-contractualpayments, removing the tax-free status of payments made for “injury to feelings”,which is relevant in discrimination cases, and introducing a qualifying periodof two years service before an individual can receive any tax free termination payment.The hypothetical example proposed suggests a sum of £6,000 tax free after twoyears service, then adds a further £1,000 tax free for each additional year ofservice. If this is the sort of figure that is eventually implemented it will resultin a significantly reduced amount that can be paid free of tax on termination.$0$0Withemployment histories being much more fluid now than they used to be, and peoplerarely staying with the same employer for over 20 years, the hypotheticalexample given will almost always result in a less attractive tax position in terminationpayment than is provided under the current system. We therefore believe that ifthe tax changes are implemented in the manner suggested it will be harder foremployers to reach agreements with staff on termination than has been the caseto now. This cannot be helpful to business or to individuals. $0$0If youneed further advice on the issues raised in this article please do not hesitateto contact us at Hallett Employment Law Services Ltd. $0

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Consultation on the future of Tax on Termination Payments

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