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Changes ahead for the Tax Treatment of Termination Payments

If you have used or are likely to use settlement agreements to settle disputes with employees, you may be interested in hearing that the Government launched a consultation on simplifying the tax treatment of termination payments on 24 July 2015.  You can access the link by clicking here.

If you have been involved in such matters, you will know that at the moment, the first £30,000 of any non-contractual termination payment can generally be paid free of tax.

The Government is however considering the proposed changes:-

  • Removing the distinction between contractual and non-contractual payments, treating all payments as earnings so that employers will no longer need to consider which parts of a termination payment are taxable and which parts are not (so for example a Pay in Lieu of Notice payment made under a contract could also attract tax-free status);
  • Replacing the fixed £30,000 tax-free sum by an amount (lower than £30,000) which would increase in line with the employee’s length of service;
  • The entitlement would only arise if the employee has at least 2 years’ service;
  • Unfair and wrongful dismissal, as well as redundancy, are to benefit from exemption, but not payments made to employees who resign in return for a payment;
  • Clarifying that injury to feelings awards can be made free of tax (subject to some exceptions).

Although the consultation document does not specifically suggest amounts or thresholds, some examples contained in the Consultation Paper would suggest that if the changes were to be implemented, it would significantly reduce the tax-free sum available for almost all employees.

Please feel free to contact us on 0191 282 2880 for a no obligation chat or email us if you require further advice.

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