Our website uses cookies to enhance the visitor experience (what's a cookieCookies are small text files that are stored on your computer when you visit a website. They are mainly used as a way of improving the website functionalities or to provide more advanced statistical data.). Are you happy for us to use cookies during your visits?
Please note: continuing without making a choice equates to giving us your consent, which you can withdraw at any time via our cookies policy page.

Call us on 01457 860 285

Lomas and company - chartered accountants - advisors to business

Request a Callback

  • Book a Free Consultation
  • Get a Fixed Quote
Take our Monthly Poll
Your Business Size

Find out how to Make more, Keep more and Work less


Termination payments consultation

Newsletter issue - October 2016.

Following a recent consultation, the Office for Tax Simplification (OTS) is currently consulting on proposed changes to the tax and National Insurance Contributions (NICs) treatment of termination payments.

The current rules governing termination payments are complex and are sometimes open to manipulation by employers to take advantage of the employer NIC exemption in particular. Employers sometimes attempt to change the nature of payments so that they effectively become exempt termination payments, where strictly, they should be charged to tax and NICs.

The proposed changes are therefore designed to provide certainty for employers and employees, whilst being fair, simple to implement, and not open to abuse or manipulation. At present, the government is proposing the following changes, which if enacted, will take effect from April 2018:

  • the first £30,000 of a termination payment will remain exempt from income tax; and any payment paid to any employee that relates solely to the termination of the employment will continue to have an unlimited employee NICs exemption.
  • the scope of the exemption for termination payments will be clarified to prevent manipulation by making the tax and NICs consequences of all post-employment payments consistent. In order to achieve this, tax and Class 1 NICs will be payable on any payment that the employee would have received it they had worked their notice period, even if the employee is asked to leave employment immediately or part way through their notice period. This will also remove the confusion about the different rules for payments in lieu of notice (PILONs) by making all PILONs taxable and subject to Class 1 NICs.
  • the rules for income tax and employer NICs will be aligned so that employer NICs will be payable on payments above £30,000 (which are currently only subject to income tax).
  • the following changes will also be made to the exemptions for termination payments:
    • removal of foreign service relief; and
    • clarification that the exemption for injury does not apply in cases of injured feelings because of the divergence of judicial decisions about this issue.

The government's consultation response document and the draft legislation can be found online https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/549630/Simplification_of_the_tax_and_National_Insurance_treatment_of_termination_payments-government_response_and_consultation_on_draft_legislation.pdf .