This is an update on one of the topics from our employment/tax seminar given on 10 March 2016 and further announcement titled “BUDGET 2016 – employment related taxation changes” dated 17 March 2016.
Due to the alleged complexity of the rules and exemptions applicable to the differing types of termination payments, in July 2015 the Government launched a consultation on the way in which termination payments are treated for tax purposes (this includes tax and National Insurance contributions (“NICs”)). The proposal was to simplify the regime. The Government has now finalised this initial consultation and has published its draft legislation designed to implement the changes. The new legislation is expected to take effect in April 2018.
The key Government proposals are that:
- The first £30,000 of any non-contractual termination payment will remain exempt from income tax and NICs;
- Any payment made to an employee that relates solely to the termination of employment will have an unlimited employee NICs exemption (although alignment of the rules for income tax and employer National Insurance contributions means that payments over £30,000 will also attract employer National Insurance);
- All payments in lieu of notice (PILONs), both contractual and discretionary, will be taxable earnings and so, subject to tax and NICs;
- All other post-termination payments which would have been subject to tax and National Insurance in the event that the employee had worked their notice period (such as the cash equivalent of benefits for the notice period, paid under a PILON) will also be treated as taxable earnings (prohibiting employers/employees from arguing that such payments are damages for breach of contract and should be included in the tax free allowance);
- Removal of the foreign service relief exemption for termination payments;
- The tax free exemption for ‘injury’ will (definitively) not apply to payments made for injury to feelings.
Once the Government had concluded that the £30,000 tax free element of termination payments should be retained, it was left with limited options to achieve the desired clarity over which payments fall within that allowance. According to the commentary with the consultation document, the Government intends for the “new” tax system to provide support to those who lose their job. Whether these changes are supportive of terminating employees is questionable, however and will depend largely on the level of the employee, the contract of employment, the circumstances of termination and his or her negotiating position. Lower paid employees may well receive lesser amounts due to the additional taxation, but on the other end of the scale; higher earners with a better claim or negotiating position could well demand an increased gross sum to offset any additional deductions required to be made.
The proposed legislation is perhaps less radical than many expected, but it is expected to still have significant effect. At the very least it will provide some certainty (at least for HMRC!) as to the correct taxation of termination payments, in particular PILONs. The position surrounding the treatment of PILONs has evolved and is one which is inconsistent and often manipulated. It is a matter which the government has been keen to address for some time, and has now – finally – done so.
The proposal will be introduced through amendments to the Income Tax (Earnings and Pensions) Act 2003 (“ITEPA”). The precise wording of the legislation will be subject to further consultation until 5 October 2016, but is not expected to be drastically changed.
If you would like any further information, please contact Andrea London on 020 7955 1433.
This article should not be taken as definitive legal advice on any of the subjects covered. If you do require legal advice in relation to any of the above, please contact Andrea London as above or any member of the Rosenblatt Employment Department.