HMRC has this week proposed several changes to the taxation of termination payments, which, if approved, are due to come into force in April 2018. The changes have been proposed in a bid to make the treatment of termination payments simpler and fairer.

The main changes are as follows:

  • All payments in lieu of notice will be taxable, whether contractual or non-contractual (at the moment contractual payments in lieu of notice are taxable, whereas non-contractual payments in lieu of notice are not);
  • the £30,000 tax free allowance on certain aspects of termination payments is to be retained (a reduction on the £30,000 threshold was suggested but it was decided that this current threshold should be retained);
  • Payments over £30,000 will attract employer national insurance contributions (the current position is that termination payments above £30,000 are subject to income tax but not national insurance contributions); and
  • As well as removing the Foreign Service exemption for payments made from April 2018, HMRC has clarified that payments for injury to feelings will be subject to tax.

The draft legislation is open for consultation until 5 October 2016. The consultation document is available via Gov.uk.