Changes To Termination Payments
In March 2016 we updated you on the changes to the taxation surrounding termination payments that are due to come in from April 2018. With just under a year to go until the new changes come in, we thought you might like a reminder.
What Is A Termination Payment?
A termination payment is often paid under a settlement agreement as compensation for the employee giving up their employment law rights. The agreements are used by employers to safeguard them from having any claims brought against them which can be costly and time-consuming.
The general belief is that the first £30,000 of any termination payment, made in connection with the termination of employment, is tax-free. However, there is some confusion on this point. As a result of this and given the complexity of the legislation, the Government is simplifying the position.
So from April 2018:
- Payments in lieu of notice will be subject to income tax and national insurance contributions.
- Any post-employment payments which would have been treated as earnings had the employee worked the notice period will also be subject to tax and national insurance.
- A £30,000 exemption for payments relating solely to termination of employment will continue to be tax free with a full exemption from employee national insurance on the entire sum. Employer national insurance contributions will only be exempt in relation to the first £30,000.
What Does This Mean For You?
Currently any compensation up to £30,000, providing it is a genuine compensatory sum and not contractually owed monies, can be given tax free.
In April 2018 any termination payment up to £30,000 will remain tax free. However, payments over that amount will be subject to income tax by the employee and national insurance contributions by the employer. The risk to employees is that employers will limit their payments to £30,000 to avoid paying national insurance contributions.
The change can also be seen to equal out the tax liability between employer and employee as the employee will be subject to income tax on a figure over £30,000 and the employer will be liable for the national insurance contributions.
Need any advice regarding the above?
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Our dedicated 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.