Tax treatment of termination payments to change...

Friday, 12th August 2016

The Government has published its response to its 2015 consultation about the tax treatment of employment termination payments, confirming that, with effect from April 2018:

  • All payments in lieu of notice will be taxed in full.
  • Employers will still be able to pay departing employees a tax-free ex gratia payment of up to £30,000 (that limit has not changed since the 1908s!).
  • Employers' NICs will be payable on ex gratia payments above £30,000.
  • The exemption from tax on injury payments will no longer apply, except where there is a recognised psychiatric injury or other medical condition.
  • Other proposals made in the 2015 consultation, including limiting the tax exemption on termination payments to redundancies, and the ability to make a tax-free contribution to the employee's legal costs in relation to advice taken about the terms and effect of a Settlement Agreement, are not going to be implemented.

Whilst these new rules will of course simplify the tax treatment of termination payments, they will also make deals more expensive for employers and employees, especially when negotiating exit packages for higher-paid members of staff.

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