On 10 August 2016, HMRC published responses to its July 2015 consultation on the tax and national insurance contributions (NICs) treatment of termination payments. The response document included draft legislation to enact the proposed changes.

The objectives behind the original consultation included the desire to simplify and increase the certainty of the rules in this area.

From April 2018:

  • the distinction between contractual and non-contractual payments in lieu of notice (PILONS) will be removed; all PILONS will therefore be subject to tax and NICs
  • the £30,000 tax and NICs exemption for “genuine” termination payments (ie those payments related to termination and not taxed under any other provision of the taxable earnings legislation) will be retained
  • departing employees will continue to benefit from an unlimited employee NICs exemption on “genuine” termination payments
  • employers’ NICs will be payable on payments over £30,000
  • the tax exemption for payments for injury will exclude injury to feelings (unless in relation to psychiatric injury or another recognised medical condition)
  • foreign service relief will be (largely) abolished.

An original proposal to introduce a variable tax exemption (rather than a standard £30,000 threshold) based on the departing employee’s length of service has happily been dropped, presumably as the government has been persuaded that such a move would do nothing for the ambition of simplifying the rules.

The consultation response can be viewed here.