Budget 2016 Changes To Termination Payments

Date Added 16.03.16

The Chancellor of the Exchequer, George Osborne, announced today that from 2018 there will be some changes to the taxation of termination payments, commonly found in settlement agreements between employers and their employees.

As from April 2018, termination payments over £30,000 will now be subject to National Insurance contributions from the employer where Income Tax is also due from the Employee.

What does this mean for you?

A termination payment is often paid under a settlement agreement between employer and employee. Under these agreements, employers offer employees an amount of monetary compensation, in exchange for the employee giving up their employment rights in bringing any claims against the employment in the Employment Tribunal. The agreements are commonly used by employers to safeguard them from any potential claims, that could result in being both time consuming and costly.

The HMRC have previously said that any compensation sum up to £30,000, provided it is a compensatory sum and not contractually owed monies, will be given free of tax liability.

Under the 2016 Budget announcements, any termination payment up to £30,000 will remain tax-free. However, payments over £30,000 will be subject to income tax by the employee and national insurance contributions by the employer.

The risk with this change is that it may result in employers limited their termination payment offers to figures up to £30,000 to avoid being subject to paying national insurance contributions.

The change may seem to equal out the tax liability between employer and employee under settlement agreements. The employee will be subject to income tax on a figure over £30,000 and the employee will be liable for the national insurance contributions.

Need some advice?

Talk to Tollers! We are here for you.

Tollers’ Employment Law Team are here to help should you have any queries regarding the above changes, do not hesitate to contact us on 01604 258558.

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