Changes to termination payments tax

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On 10 August 2016, HMRC published the response to its 2015 consultation about simplifying the way termination payments are taxed. They also published draft legislation (intended to be effective from April 2018) for further consultation and the deadline for responses was 5 October 2016.

Current position

Currently the tax treatment of payments made on the termination of someone’s employment, such as payments in lieu of notice (PILON), holiday pay and retirement payments, depends largely on whether or not the payment is contractual.

There are also a number of specific exemptions, including for injury, death or employment performed outside the UK (foreign services exemption), and the armed forces.

Key proposals

The aim of the consultation is to simplify the tax treatment of termination payments in a number of ways:

1.    The first £30,000 will remain free from income tax and national insurance (NIC) where the payment relates purely to termination. However, all payments an employee should have received during their notice period will be classed as general earnings and taxed accordingly. This will include notice pay as well as any “expected bonus income” which an employee could reasonably have expected to receive if they had worked their notice.

2.    The difference between contractual and non-contractual PILON clauses will also be removed. This means from April 2018 all PILON will be subject to income tax, employer and employee NICs, and not just contractual PILON.

3.    Employer NICs will be due on all payments made over £30,000 are subject to income tax.

There are no proposals to add new exemptions however, two of the existing exemptions will be removed:

  • foreign service relief (other than in relation to seafarers); and
  • payments made for injury to feelings (except where this amounts to psychiatric injury or a recognised medical condition). HMRC believes that this is necessary due to the differing judicial decisions on this point.

Summary

Overall, if these changes are implemented in 2018, it will be interesting to see whether or not they have the desired effect of simplifying the way termination payments are taxed.

In particular, some have voiced concerns that the removal of existing exemptions will in fact add to the complexities on an employee’s termination. It will also no doubt change the approach taken to settle “without prejudice” negotiations.

If you have any queries on what the changes mean for your club, please call our dedicated County FA Helpline on 08448 240 432 or email [email protected].