Are we facing the end of the £30k tax exemption on termination payments?

Posted on Sep 7, 2015

Under the banner of “we want to simplify the tax regime” the Government has issued a consultation paper on the tax treatment of termination payments. They believe that the current system is “fraught with confusion and uncertainty”.

Well, that might on occasion be true, but really is this just a chance for HMRC to get their hands on some more tax?

The proposal in essence is this:

  • There will be no difference between contractual and non-contractual termination payments.
  • Instead there will be a new exemption for employees who have completed two years’ service, with the exemption increasing in line with the employee’s length of service, subject to a maximum amount (as yet unknown).
  • However – and this is where it gets narrowed substantially, it is proposed that this would only apply to redundancy dismissals, with separate exemptions for compensation relating to discrimination, wrongful and unfair dismissal. At the moment It is unclear whether these additional exemptions will be capped and whether there will be a distinction between compensation agreed out of court (such as under a settlement agreement) and that ordered by a tribunal.

What does this mean for employers?

Although this might make things simpler (no more arguing over whether there is an auto PILON) employers may face a more difficult job with negotiated terminations. The tax bill is likely to rise, and employers will be looking to put terminations down to redundancy in order to qualify for tax relief.  Undoubtedly, old uncertainties will be replaced with new uncertainties if the new proposals are not drafted carefully.

The Consultation is open until 16 October 2015 and for those who want the detail, the consultation paper can be found here.