On 24 July 2015, HMRC and HM Treasury issued a joint consultation on the tax and national insurance contributions (NICs) treatment of payments made on termination of employment.  In acknowledging that the law in this area is confusing for both employers and employees, the aim of the wide-ranging consultation is to reform this area of law to ensure that the tax and NICs treatment of termination payments is simpler and fairer.
Following a review by the Office of Tax Simplification (OTS), HMRC has agreed that the law in this area is complex and confusing.  This is partly because the income tax and NICs treatment of termination payments is not the same (for example, a payment as compensation for loss of office of less than £30,000 is not liable to income tax or NICs, but a payment over £30,000 is subject to income tax but not NICs).  It is also partly because payments of a similar nature are taxed in different ways – a contractual payment in lieu of notice (PILON) is taxed in a different way to a non-contractual PILON.
Reforms that the Government is considering include:

  • removing the distinction between contractual and non-contractual termination payments;
  • aligning the income tax and NICs treatment of termination payments;
  • replacing the existing £30,000 exemption with a new exemption for redundancy (compulsory and voluntary) payments which increases proportionately with length of service;
  • creating further exemptions for wrongful dismissal, unfair dismissal and discrimination compensation (possibly subject to a cap);
  • a review of the existing exemptions (for example, the exemption for employees’ legal costs in connection with a settlement agreement or tribunal order) with consideration to removing some or all of them.

The consultation is wide-ranging and at this stage it is far from clear what the outcome will be.  However, the slanting of the proposals towards compensation for statutory employment claims such as unfair dismissal and redundancy means that, if implemented, those with less than two years’ service (who are currently entitled to benefit from the £30,000 exemption in relation to an ex gratia termination payment) will be disadvantaged and the effect for those with longer service will depend on the positioning of the sliding scale.
The consultation is open for comments until 16 October 2015.

A copy of the consultation can be found HERE.