Termination payments revisited

Following a review of termination payments by the Office of Tax Simplifications in 2014, which concluded that the current system is both confusing and uncertain, the government has published a consultation on this area. More often than not employers want to pay the correct amount of tax but simply can’t get to grips with the convoluted tax rules.

At the time of writing, where an employee is provided with any payment in connection with leaving their employment, the first £30,000 of any non-contractual payment, such as statutory redundancy pay or damages for wrongful dismissal (effectively non-contractual payment in lieu of notice ‘PILON’) is not subject to tax and National Insurance contributions. In contrast, a contractual termination payment (PILON) is taxable if the terms of the employment contract specifically give the employer the right to pay in lieu.

One option in the consultation document is for termination payment exemptions to only be available for payments which are made in connection to redundancy, as defined in s39 of the Employment Rights Act 1996, also to include voluntary redundancy.   

Another option is to remove the contractual/non-contractual distinction for all termination payments, allowing for any termination payment up to £30,000 to be tax free. This is unlikely to be adopted as the government does not think that the availability of a blanket exemption will meet its objectives, and would frankly be unaffordable.   

The government is therefore considering subjecting any exemption to a qualifying period of 2 complete years of continuous service with the same employer (or an associated employer or a transferee following a TUPE transfer), which will increase proportionately with the number of complete years of service. 

Introducing anti-avoidance provisions to regulate the new rules on termination payments are also considered, in order to ensure that the exemptions cannot be used as a form of tax free remuneration. Further, any payments made through salary sacrifice arrangements will not qualify for any tax exemptions.

The consultation is open for responses until 16th October 2015 and the government is planning to announce its findings on termination payment rules as part of the Autumn Statement 2015.   

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