The new regime for termination payments

Graham Muir, Tax Partner, CMS


Following a consultation process in 2015, the Government announced at Budget 2016 that it would make changes to the taxation of termination payments. The Office of Tax Simplification (OTS) had previously highlighted the complexity of the existing rules in its report in 2014 and recommended that they be simplified. On 10 August 2016, HMRC published a further consultation document together with draft legislation which would operate to:

• treat all payments in lieu of notice (PILONs) as earnings, regardless of whether they are contractual or non-contractual;
• charge employer’s NIC on termination payments which are subject to income tax (i.e. on termination payments above £30,000);
• clarify that the exemption from income tax for termination payments in relation to injury or disability does not include payments made for injury to feelings (unless they amount to a psychiatric injury or other recognised medical condition); and
• remove the Foreign Service Relief exemption from the termination payments legislation, except in relation to seafarers.

The proposed new rules providing a new regime for PILONs were extremely complex and went considerably further than legislating merely for PILONS in the normal usage of that phrase. For those reasons, many of the responses to the consultation made the point that the new rules did not achieve the Government’s stated aims of (amongst other things) being simple and providing certainty to employees and employers. The new rules would also be revenue raising (as a result of the imposition of employer’s NICs), rather than revenue neutral – it was the intention of the OTS that any change to the regime be revenue neutral and for it to be otherwise was considered by commentators to be inappropriate and contrary to policy.

Autumn Statement 2016 announcement

The Autumn Statement confirmed that termination payments over £30,000 will be subject to employer’s NIC. It appears (although very little information is currently available) that the government has responded to criticisms relating to the new rules on PILONs, by applying tax only on such part of a termination payment as represents the unworked portion of an employee’s notice period (calculated at the rate of their basic salary). The draft legislation published previously required an assessment to be made of the amount of other payments (such as bonus) which could reasonably be expected to have been received during the notice period, and applied tax also to such amounts. Assuming that this simplification is reflected in the new draft legislation when it is published on 5 December, this change is much to be welcomed.


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