The government have published a consultation on employee termination payments: Simplification of the Tax and National Insurance Treatment of Termination Payments. It follows a review by the Office of Tax Simplification (OTS).

The need for change

The current system is complicated, and employers can make mistakes when trying to operate the correct amount of tax. In some cases, an employer who does not want to risk making an error might even deduct tax on a non-taxable payment. The OTS study cited the misapprehension that most advisers will be familiar with, that departing employees believe the exemption is automatic up to £30,000.

Summary of OTS findings:

  • Widespread belief that £30,000 exemption applies to anything received
  • Many employers do not understand how exemptions operate  e.g. differences between contractual and non-contractual payments
  • Time consuming and difficult to identify individual elements of payments
  • Current system is unfair because higher earners more able to structure affairs so as to benefit from the exemptions

Proposed reforms

The Government essentially agreed with all of the findings of the OTS, and has opened a consultation on a number of reforms it intends to make. Two key simplifications that will be made are:

  • Removing the distinction between contractual and non-contractual payments this will mean payments will be taxed and subject to NIC in the same way, regardless of whether the payment was provided for in the contract or whether it is established practice for the employer to make such payments.
  • Aligning the NIC treatment of payments with the income tax treatment: the Government considers it illogical that a termination payment (such as a genuine ex gratia payment) can be subject to tax but not NIC. An example of this under the current rules would be a payment that is in excess of £30,000, but is not contractual or customary.


The Government is keen to continue to provide relief from tax and NIC in genuine cases; it however wants to ensure The way in which the reforms will be made is what is now subject to discussion, and makes up much of the consultation document. The options being considered in the document are:

  • A blanket exemption which would apply to all payments, and remove the need to distinguish between various elements of a termination payment. The exemption would be lower than the current £30,000.
  • Linking the exemption to Statutory Redundancy Pay (SRP), possibly by making the exemption a multiple of the SRP entitlement, and requiring entitlement to SRP.
  • Introducing a new exemption, that would increase by reference to the SRP entitlement. This would see longer term employees entitled to more exemption. It would also require a minimum employment of two years.

A further consideration is to restrict the scope of any exemption to payments made in respect of redundancy.

Other reliefs

The document also invites comment on whether to abolish or restrict the exemptions for payments in respect of injury or disability, and for HM Forces employees.

The consultation is open until 16 October 2015, and can be viewed here. 


16 August 2016: HMRC have now released their response to the consultation and draft legislation to implement their proposed changes.  See Consultation: tax & NICs on termination payments

Useful links:

Our Practical Tax Guide to Termination, redundancy and leaving payments