As expected, yesterday’s Budget included announcements in many employment-related tax areas, although often not in the way expected. There was also one complete surprise. 

The expected areas covered were: 

Termination payments

The Government announced last year that it was reviewing the termination payment taxation regime. 

The only change expressly announced in the Budget papers yesterday was one that is to take effect from April 2018. This will impose employer’s (but not employee’s) NICs on all taxable termination payments above £30,000. 

It has also emerged, however, from a response given to those who participated in the consultation process that the Government proposes to make additional changes from April 2018 as follows: 

  • all PILON payments will be taxable in full as earnings and subject to NICs in the same way. This is irrespective of whether they are payments expressly permitted under the contract in lieu of notice or payments by way of damages in lieu of notice not being given (which sounds a very narrow distinction but for many years has had a substantial tax and NIC difference).
  • in addition, certain other contractual termination payments will now be taxed as earnings and so fully subject to income tax and NICs. It is not clear what this refers to but one obvious candidate could be contractual redundancy payments.
  • finally, the exemption from foreign service will be removed, though the effect of the removal of this exemption is unclear given that so many termination payments will be taxable anyway meaning that its continued use would be rare in any event. 

One of the proposals the Government had suggested in its consultation process was that only statutory redundancy and unfair dismissal payments (and certain payments for sickness etc) would be able to benefit from the termination payment tax exemptions. Although it is difficult to read too much from what has been disclosed, it may well be that this is the net effect of the Government proposals, although ex gratia payments are not expressly mentioned as being taxable. While a £30,000 exemption is clearly still going to be available, quite what will be left for it to cover is far from certain. 

A new consultation will take place this year – only then may more become clear. 

Salary sacrifice

This was seen as a strong candidate for anti-avoidance legislation. However, the Government has just said that it is looking at this area further and has in the meantime reassured employers that pension, childcare and health-related arrangements (such as cycle-to-work) schemes are not a target. While private medical care is not mentioned, it is assumed that this is not a target either as it is the most popular health-related arrangement. Employers will at least be pleased that the main salary sacrifice areas are safe and that they will not face the prospect of unwinding them if main employer’s NICs savings had been shared with employees and the employer’s cost position needed to be restored. 

Travel and subsistence

The Government has also been reviewing the tax rules in this area. While it has decided that for employees as a whole the current system works well and so no changes will be made, the Government is moving ahead to restrict with effect from April this year the currently more generous rules that apply to intermediaries (often personal service companies) so that they are subject to the same rules as most employees. Client companies may therefore simply end up being billed more by the intermediaries because of this increased cost. 

Intermediaries and the public sector

From April 2017, the public sector will have to operate relevant payroll rules for intermediaries it uses. This is one of the least clear announcements (other than that it will not impact the private sector). However, it will clearly make the public sector less likely to use these arrangements for consultants. 


Various administrative arrangements are proposed, including extending voluntary PAYE for benefits and streamlining PAYE settlement agreements. 

Employee shareholder shares

Finally, the surprise. Employee shareholder shares, where employees give up various statutory rights in return for shares on which there are tax-free capital gains, have been targeted. These have become popular in private equity owned companies. However, for shares issued pursuant to agreements entered into after 16 March 2016, the tax-free gain is limited to £100,000 worth of life-time gains on employee shareholder shares. Employee shareholder share arrangements entered into on or before 16 March 2016 remain unaffected. It remains to be seen whether this limit materially reduces interest in the scheme. A tax-free gain of £100,000 is still a saving of £20,000 at the new capital gains tax rate of 20%, but clearly only if there is a sufficient gain on the shares, which is far from guaranteed.