Proposals for simplifying income tax and NI contributions on termination payments

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The retention of the £30,000 tax and NIC exemption is to be welcomed.   The original consultation proposal had been to remove it and introduce a variable threshold based on length of service or to limit it to termination payments made on redundancy only.  Nevertheless, it is likely to become trickier to structure termination payments in a tax efficient way because the legislation is designed to prevent the manipulation of notice clauses and payments to enable the payment to be considered non-contractual.

The draft legislation also clarifies that the existing exemption from tax for payments made for injury does not include injury to feelings awards in discrimination claims except where the award relates to a psychiatric injury or recognised medical condition. It also aligns the rules for income tax and employer’s NICs so that employer’s NICs will be payable on amounts in excess of £30,000.

We expect to see the final draft legislation included in the Finance Bill 2017 and the new regime is expected to take effect from April 2018. Once the final scheme is confirmed employers will need to review existing settlement agreements and termination payment structures to ensure that they fit with the new rules and that opportunities for tax efficiency are identified where possible.

If you would like further advice on this topic please contact David Smedley or Andrew Rayment.