The new termination payments regime – draft legislation published

Graham Muir, Tax Partner, CMS

Following the announcement in the Autumn Statement, the revised draft legislation relating to the new regime on the taxation of termination payments, due to apply from April 2018, was published on 5 December 2016. As presaged by the Chancellor, the legislation has greatly simplified the original proposals, removing the complexity (and the potential unfairness) inherent in the previously proposed rules treating “expected bonus income” as fully taxable.

The legislation now compares the amount of “basic pay” which would have been paid during any unworked portion of an individual’s notice period with the aggregate amount paid on termination – only to the extent that the latter exceeds the former will it qualify for the £30,000 exemption. This removes the previous distinction between payments in lieu of notice which were treated as contractual, and therefore taxable, and those treated as non-contractual and therefore eligible for the £30,000 exemption.


“Basic pay” for this purpose is determined by reference to (broadly) the amount of pay received in the year prior to the termination but excluding overtime, bonuses, commission and the amount of any taxable benefits. It also includes any amount waived by the relevant individual during that year. The idea is that “basic pay” will reflect the amount of basic salary which the individual would have earned during the unworked portion of his notice period.

However, one notable problem with the legislation as drafted is that it would currently include any amounts taxable as employment income during the relevant pre-termination period which arose on, for example, the exercise of share options (or otherwise under the employment-related securities regime). This appears to be a clear error, which one would expect to see corrected before enactment of the legislation.

Apart from the above, the legislation is much in the same form as previously published. In brief, with effect from April 2018, in addition to the change referred to above (which simplifies the tax treatment of payments in lieu of notice), employer’s NIC will apply to termination payments not within the £30,000 exemption.  The relief for payment in respect of foreign service will be removed (although the relevant charging provisions will not apply if no part of the relevant employment was taxable in the United Kingdom).


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