Government Simplifies Proposed New Rules on Taxation of Termination Payments
Following the government's consultation on the proposed new rules earlier this year, the draft Finance Bill 2017 contains revised rules on the taxation of termination payments. The government has listened to the consultation responses and simplified the new rules to reduce the administrative burden on employers.
The following changes to the taxation of termination payments are still going to be made:
- Employer (but not employee) NICs will be due on termination payments above GBP 30,000
- The foreign service relief will be removed for employees who have spent time working outside of the UK
- Payments for injury to feeling are not exempt unless the injury amounts to a psychiatric injury or other recognised medical condition.
The main change from the initial consultation relates to the taxation of payments in relation to unworked notice periods where an employee does not work the whole of their notice. Under the revised draft rules, only the equivalent of the employee's basic pay in respect of the unworked notice period is subject to income tax and NICs. This contrasts with the previous draft rules that sought to tax any payments that the employee might have received during their notice period, eg, bonus. The cap at the level of basic pay is welcome because it makes it easier for an employer to calculate as it is no longer necessary to value benefits or estimate what an employee's bonus might have been.
An employee's basic pay is calculated based on the average over the year prior to termination. However, any amounts given up (eg, under salary sacrifice) are counted as basic pay and so employers will need to use employees' headline pay rate before such deductions.
Contractual payments in lieu of notice (PILONS) will remain taxable, but these new draft rules will catch payments that might otherwise have been treated as damages.
The new rules will apply from 6 April 2018.