HMRC has published proposals to reform the tax treatment of payments on termination of employment which will have a significant impact on the approach to many dismissals and settlement agreements.
Firmly in its sights for reform is the £30,000 tax exemption. As the proposal document states, the rules for applying this exemption are indeed complex, but the real reason for reforms is surely to:
- collect more tax by reducing both the level of the exemption and the scope for avoidance; and
- bring termination payments firmly within the NIC system – currently payments of compensation are not subject to NICs at all.
Various proposals are put forward for consultation, but the approach that HMRC appears to favour is to have a much lower level of permitted tax free payment that:
- is available to employees with at least two years’ service;
- increases with service; and
- applies only on redundancy.
However, if HMRC gets its way on its proposal to have a redundancy-only exemption, it seems willing to offer two new exemptions, one for payments in connection with unfair dismissal or wrongful dismissal, the other for compensation for discrimination. The consultation document gives no details of the extent of these possible exemptions, but the clear message is that £30,000 is too high. If these new exemptions were to become law, they would restore some of the scope for tax planning that would be lost if the main exemption is limited to redundancy situations and is reduced to a much lower level. “Simplification” (i.e. abolition) is also proposed for all other tax exemptions that apply to termination payments, including the employer’s contribution to legal costs and payments under the foreign service exemption, with the exception of payments in respect of injury or disability.
Consultation closes on 16 October 2015 so new legislation in the Spring of 2016 seems highly likely.
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