Introduction
In July 2015 HM Revenue & Customs looked into the tax and National Insurance contributions payable on the taxation of termination payments. The aim of the inspection was to simplify the treatment of termination payments, and HM Revenue & Customs hope to prevent the potential for employers to take advantage of the current rules.
At the moment, employers are sometimes able to change the nature of certain payments they make to their employees, to make them seem like termination payments which could be exempt from certain tax liabilities. An example of this is changing an employee’s bonus, which would usually be subject to tax and National Insurance contributions, into a termination payment to avoid the usual tax implications.
Proposed Changes
Following HM Revenue & Customs’ consultation, the government announced during the Budget in 2016 that it would implement certain changes, such changes taking effect from April 2018. These proposals have been made into draft legislation, which are open for inspection and consultation until 5th October 2016.
Some of the main changes the government aim to make to the treatment of termination payments are based on simplifying the scope of the exemption rules by making these, as they relate to post-employment payments, consistent.
To do this the government aims to make any payment to an employee for work performed during their notice period or – if the employee is asked to leave employment earlier than their required notice period – their payment in lieu of notice subject to tax and National Insurance contributions.
The government also intends to make all post-termination payments above £30,000 subject to National Insurance contributions, on top of the current rules which make these payments subject to income tax.
In addition to the main changes highlighted above, the government wants to remove the current exemption of foreign service relief and clarify the existing exemption for injury to ensure it does not apply to cases of injured feelings.
What Won’t Be Changing
While the government intends to make many changes to the treatment of termination payments, as mentioned above, they are still aiming to ensure that recently-unemployed individuals are supported in the same way as they are at present.;
For example, the first £30,000 of an employee’s termination payment will still be exempt from income tax.
Likewise, any payment to an employee that is solely because of the termination of their employment remains exempt from employee National Insurance contributions.
If you would like to read more about these upcoming changes, please see HM Revenue & Customs’ guide here and if you have any employment questions then please do not hesitate to call Amanda Badley on 0116 402 9019 or email on amanda.badley@bhwsolicitors.com.