A consultation is underway (closing on 16 October 2015) on simplifying the tax treatment of termination payments. The proposals are a significant move away from the current regime.
The current system is complex and employers/employees often unintentionally get it wrong and become embroiled in difficult discussions with HMRC. The Government want a new system which is simple, certain, easy to administer, fair and, perhaps most importantly for the Government, affordable. Any reform of the current system is therefore welcomed. However, the Government’s specific proposals may not be welcomed by all. They include:
- Removal of the distinction between contractual and discretionary payments making all termination payments subject to the same tax rules. This would be a good change, particularly in relation to payments in lieu of notice.
- Align the income tax and NIC rules regarding termination payment, currently the two regimes operate slightly differently.
- A new exemption to replace the current £30,000 exemption. The Government’s proposal is that the new exemption should only be available once employees have reached 2 years’ service and then increase proportionately based on length of service subject to a cap. It is also considering limiting this new exemption to redundancy dismissals (including voluntary dismissals). The current £30,000 exemption applies to any type of termination.
- Anti-avoidance measures are being considered alongside the new exemption, such that the new exemption would not be available where:
- the employee has agreed a salary sacrifice arrangement in return for a tax-free payment on termination,
- the employee is resigning (although voluntary redundancy would be eligible for exemption), or
- the termination arises on expiry of a fixed term arrangement.
- Also, the Government is considering a re-charging of any termination payment that was otherwise exempt where the employee is re-engaged by the employer within 12 months of leaving.
- The Government is seeking views on whether the new exemption should replace all of the various current exemptions or just them main £30,000 exemption. For example, it proposes to retain an exemption for payments made in respect of injury to feelings or personal injury damages in a discrimination claim (with proposals to simplify that specific exemption), but remove the current exemption for legal costs incurred by the employee in seeking legal advice in relation to the termination of their employment, usually in the context of a settlement agreement.
- If the Government proceeds with a redundancy only exemption, then it is considering introducing two further exemptions in respect of unfair dismissal and discrimination compensation. The Government seeks views as to whether such exemptions should distinguish between Tribunal awards for successful claims and settlement sums agreed between employer and employee in respect of such claims.
It seems we are likely to end up with a situation where fewer employees will be entitled to a tax exemption on termination of their employment or benefit at the levels currently enjoyed as a trade-off for a (slightly) less complex new regime.