On 10 August 2016 HMRC published its proposals for the 'Simplification of the tax and National Insurance treatment of termination payments: government response and consultation on draft legislation'.
The changes, if legislated, will take effect from April 2018. It is debatable as to whether HMRC will have achieved their aim of simplification, and some commentators have suggested that the removal of some existing exemptions, such as Foreign Service Relief will in fact add to the burden of complexity on termination.
The deadline for responses to HMRC is 5 October 2016, so set out below is a reminder of the key proposals.
To date, the first £30,000 of a termination payment is free of income tax. This exemption will remain together with the National Insurance (NIC) free treatment of any payment made to the employee relating solely to termination will continue have an unlimited NIC exemption. However it is important to note that this does not apply to any payment made on termination: the elements of the payment must be identified (eg payments in lieu of notice (PILONs), payments for holiday entitlement not taken, retirement payments, payments for termination on injury, death etc.) and each will be taxed/subject to NIC or not on the appropriate basis.
From April 2018 all PILONs will be taxable and subject to NIC whether or not they are contractual (formerly only contractual payments were caught). Furthermore, any payments, bonus or benefits which an employee 'could reasonably be expected to receive' had they worked their notice period will be fully subject to income tax and NIC.
Employer's Class 1 NIC (currently at 13.8%) will be due on payments over the £30,000 threshold where such payments are also subject to income tax.
There are no proposals to add to the current exemptions and two of the existing reliefs will be removed, namely:
- foreign service relief (which can exempt some or all of the payment if the individual has previously worked abroad)
- payments made for injury to feelings where a termination payment is made in respect of injury or disability: HMRC believes that this is necessary due to the divergence of judicial decisions on this point.