Following a consultation launched in 2015, the Government has confirmed that it will legislate for changes to the tax treatment of termination payments with effect from April 2018.
To date there has always been scope for confusion as to the correct tax treatment of termination payments, particularly where they involve payments in lieu of notice (PILONs). Following a recommendation of the Office of Tax Simplification in 2014 to reform this area, the Government launched a consultation in 2015 and published its proposals earlier this year.
In summary, the reform will do four main things:
i. The distinction between contractual and non-contractual PILONS will be removed. This will mean that all PILONs will be treated as earnings subject to income tax, employer and employee National Insurance contributions (NICs).
ii. The exemption from income tax and NICs for termination payments (currently £30,000) will be retained. This will not extend to payments that an employee receives, or would have received, during their notice period; these will be taxable as general earnings.
iii. Employer (but not employee) NICs will be payable on payments above £30,000.
iv. Payments for injury to feelings will fall outside the exemption for injury payments, except where this amounts to a psychiatric injury or a recognised medical condition. This is to overrule and clarify some recent conflicting Tribunal decisions (see our previous articles here and here), one of which ruled that payments for injury to feelings were covered by this exemption.
We expect these new rules to take effect from April 2018.