No more £30k tax free?

30 Jul 2015

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.

For more information, contact:

Further reading

What’s the state of Employment Status?

Blog, News & PR
Rebecca Thornley-Gibson highlights the challenges faced by businesses who struggle to determine employment status and the impact this has on innovative operating models
Read more Read

Employer's question: how to effectively deal with stress related sickness in lockdown

There are a variety of contributing factors caused by the pandemic that have seen a rise in stress related claims at work, but how can employers deal with this more effectively?
Read more Read

Use of statutory demand to make company insolvent suspended until June

Blog, Legal Updates
Cheraine Williams looks at more temporary Covid-driven measures that will protect businesses and tenants from possible legal action
Read more Read

New guidance issued for valuation of flats and investigating fire safety

Blog, Legal Updates
Cheraine Williams looks a the current situation facing leaseholders looking to sell or re-finance their property; will new guidance provide clarity?
Read more Read
  • Brighton Office

    1 Jubilee Street


    East Sussex

    BN1 1GE

  • Gatwick Office

    Griffin House

    135 High Street


    West Sussex

    RH10 1DQ

  • Guildford Office

    Wonersh House

    The Guildway

    Old Portsmouth Road



    GU3 1LR

  • Horsham Office

    Ridgeland House

    15 Carfax


    West Sussex

    RH12 1DY

  • London Office

    6 New Street Square

    New Fetter Lane


    EC4A 3BF

  • Get in touch