14 August 2014 #Employment
The Office of Tax Simplification (OTS) has recently published its final report which includes the taxation of termination payments as well as considering some other areas.
Currently, although payments and benefits received in connection with a termination of employment are taxable, the first £30,000 can be paid tax free, provided it is genuinely paid on account of redundancy or as damages (for example for unfair or wrongful dismissal). Earnings and contractual notice pay do not fall within this exemption.
The OTS thinks this area gives rise to confusion as many believe that the first £30,000 of any ‘payoff’ will be tax-free which is not always the case. It wishes to simplify the current tax exemption by instead only making income tax relief available where the employee qualifies for a statutory redundancy payment. It also suggests a government review of the existing exemptions, reliefs and reductions for termination payments (such as legal costs). The OTS proposes an exemption figure (of either a flat amount or a multiple of the employee’s entitlement to a statutory redundancy pay) which would be applied to the total sum of the termination payments (as opposed to the current system where the tax treatment of each payment varies according to the nature of the payment). It has also suggested that payments above the exempt threshold be subject to NICs. If accepted, this would be a major change as those employees being paid compensation under settlement agreements who are terminated for reasons other than redundancy will not benefit from a tax exemption. This would most likely increase costs for employers who may have to offer more to get a deal.