HMRC have published their response to the 2015 consultation 'Simplification of the tax and National Insurance treatment of termination payments' together with draft legislation for consultation, to implement their proposed changes.
The original consultation followed a review by the Office of Tax Simplification (OTS) which highlighted that the current system is complicated and can lead to employers making mistakes. HMRC were also concerned that the current rules encouraged manipulation by employers to take advantage of NIC exemptions.
That consultation contained a number of proposals for simplifying the income tax and NIC treatment of termination payments. Following feedback received the government propose to:
- Retain the current £30,000 income tax exemption and unlimited employee NIC exemption for payments relating directly to termination.
- Make all Payments In Lieu Of Notice (PILONs) subject to tax and NICs as earnings regardless of whether they are contractual or not.
- Treat any other contractual payment, including amounts that the employee would have received if they had worked their notice period (even if they don’t), as earnings subject to income tax and NICs
- Align the rules for income tax and NICs, so that employer NICs will be due on payments over £30,000.
- Remove foreign service relief.
- Clarify that the exemption for injury does not apply to injured feelings.
The changes will all apply from April 2018.
Consultation on the draft legislation will run until 5 October 2016, with a second draft of the legislation to be published in Finance Bill 2017.
UPDATE:
The changes were removed from the Finance (No2) Bill 2016/17 before the Finance Act 2017 was passed. They tax changes are now included patly in the Finance Bill 2017-19 and partly the Finance Bill 2017-18: they will still take effect from April 2018.
The changes to employer's National Insuarnce will not take effect until April 2019.
Links
Our subscriber guide: Termination, redundancy and leaving payments
The consultation response document and draft legislation can be found here.
