Employment Article Sep 2014

HMRC – New Rules on Tax Treatment of Termination Payments

Aug 18, 2016

HM Revenue and Customs (HMRC) is proposing to change the rules governing taxation of termination payments. The changes are intended to come into force in April 2018.

Currently HMRC has an exemption whereby certain termination payments up to £30,000 can be paid without deductions for tax and national insurance. It applies where payments are intended to be compensation rather than income. 

Historically the same principle could be applied to notice pay where there was not a clause permitting the employer to make payment in lieu of the employee working their notice period. In such circumstances HMRC often viewed such payments as compensation rather than income as technically they amounted to a breach of contract and could therefore be paid tax free. 

As a result of a recent consultation HMRC propose the following key changes:

  • All payments in lieu of notice to be treated as taxable regardless of whether they are contractual or not 
  • Employer National Insurance contributions to be paid on sums over £30,000
  • To ensure that payments for injury to feelings are subject to tax.

Since the introduction of Employment Tribunal fees in 2013 and as a result of the focus on resolving disputes without the need for recourse to Tribunal proceedings, it has become increasingly common for employers to use Settlement Agreements and to seek to settle any potential claims by paying the employee a nominal sum in exchange for them waiving any rights they may have to bring a claim. 

For an employee, one of the main attractions of a Settlement Agreement is that they provide them with a benefit of a tax free payment. It will be interesting to see how HMRC’s proposed changes to the tax treatment of Termination Payments will affect employees going forward, and in particular, their employers’ generosity now that that there may be greater tax implication for them. 

For more information and to find out how we can help you, please contact a member of our Employment Team on 01279 755777.

Joanna Sutton

About the author

Joanna Sutton

Joanna qualified as a solicitor in 2010 and joined Nockolds as a Senior Associate in March 2016 having previously worked and trained at another firm ...

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