Government Consults on the Implications of Termination Payments

The Government has announced that it has begun the process of consulting on simplifying the tax treatment of termination payments.

Among other things, the consultation aims to:

  • Seek views on removing the distinction between contractual and non-contractual termination payments
  • Establish whether this would make it easier for employers and employees to understand
  • Decide whether the income tax and National Insurance treatment of termination payments should be aligned

It appears to have stemmed from recommendations previously made by the Office of Tax Simplification (OTS).

The Office of Tax Simplification Recommendations

The OTS was set-up by the Government in July 2010, and was tasked with providing independent advice on simplifying the UK tax system. In July 2014 the OTS published their findings, which recommended reform of taxation of termination payments. In particular, it recommended a move away from the £30,000 tax exemption threshold currently in place, which applies to the vast majority of non-contractual termination payments.

The OTS also recommended a move towards a system of tax relief applicable to all termination payments, but only if the reason is statutory redundancy. The OTS also recommends that such relief is capped by a multiplier of the statutory redundancy payment to which the employee is entitled. If the OTS’s Recommendations are followed then this would subsequently mean that all other termination payments (other than those relating to statutory redundancy) would be taxable without attracting the current £30,000 tax exemption threshold.

Reviewing the Taxation of Termination Payments

Following the OTS recommendations, the Government has decided to review the taxation of termination payments, with the aim of creating a regime that is easier for employers to administer and employees to understand. George Osborne did briefly address the issue in the July 2015 Budget, and now the Government has taken the formal step of beginning the consultation period – which will run until the 16th of October 2015.

After the consultation period has ended, the Government will publish details of the responses, and is due to make an announcement on any decisions made in light of those responses in the 2015 Autumn Statement.

Employment Law Advice from Slater Heelis

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