Victoria Goode October 11 2017 Taxation of termination payments – updated legislation published Lewis Silkin LLP | Employment & Immigration - United Kingdom Victoria Goode Employment & Immigration IntroductionFinance Bill 2017Foreign service exemptionCommentIntroductionThe government proposes to make a number of changes to the tax and national insurance (NI) treatment of termination payments (for further information please see "Tax treatment of termination payments – simplification at last?").Draft legislation was initially published for comment in December 2016. The newly published Finance Bills 2017 and 2018 contain the latest version of the legislation – the version likely to be enacted.The rules regarding non-contractual payments in lieu of notice have been considerably simplified. However, the circumstances in which foreign service exemption or relief will be abolished have been widened.Finance Bill 2017Under the Finance Bill 2017, the following changes will apply to payments made on or after April 6 2018:The employer NI rules will be aligned with the income tax rules; therefore, a termination payment which benefits from the £30,000 tax exemption will be subject to income tax and employer Class 1A NI on amounts over £30,000. The existing employee NI exemption will be retained, even if the payment exceeds £30,000.The distinction between the different types of payment in lieu of notice will be removed. In broad terms, the basic pay that an employee would have received had he or she worked out his or her notice is subject to tax and NI in full, irrespective of whether the employment contract contains a clause that gives the employer the right to terminate the employee's employment by making a payment in lieu of notice. For these purposes, 'basic pay' is the employee's pre-salary sacrifice pay in the pay period immediately before the date on which notice is given or, if no notice is given, the date on which the employment terminates. Basic pay excludes:overtime;bonuses;commission;allowances;shares and share option gains; andbenefits in kind.The disability exemption will not apply to compensation for injured feelings, unless the injured feelings amount to a psychiatric injury. The disability exemption provides 100% tax exemption for termination payments made only on account of the employee's disability or injury where it prevents the employee from carrying out the duties of his or her employment.Foreign service exemptionThe Finance Bill 2018 provides that employees (excluding seafarers) whose employment terminates on or after April 6 2018 and who receive a termination payment on or after September 13 2017 will not be able to claim foreign service exemption or relief if they are tax resident in the United Kingdom in the tax year in which their employment terminates. At present, some or all of a termination payment paid to an employee with a period of foreign service during his or her employment may be exempt from income tax, depending on the length of the foreign service compared to the total service. The new rules could affect a number of individuals, given that employees whose employment terminates while they are on an international secondment often return to the United Kingdom immediately.For these purposes, residence status will be determined in accordance with the normal statutory residence test. Under this test, the number of days that the individual is present in the United Kingdom and the number of ties that the individual has with the United Kingdom are both considered.CommentAlthough the simplification of the rules around payments in lieu of notice is welcome, overall these changes will have significant practical and cost implications for employers and employees. Employers will need to factor in the additional costs in their settlement negotiations.For further information on this topic please contact Victoria Goode at Lewis Silkin by telephone (+44 20 7074 8000) or email ([email protected]). The Lewis Silkin website can be accessed at www.lewissilkin.com.