Tax treatment of termination payments – simplification at last?

The Chancellor’s Autumn Statement included some welcome news regarding the forthcoming reform of the tax and national insurance (“NI”) treatment of termination payments. The Government launched a consultation to simplify the rules in 2016. Some months later, as previously reported, a technical consultation was published confirming the proposed changes to take effect from 6 April 2018 together with draft legislation.

A number of responses to the technical consultation raised concerns about the complexity of the proposed changes. The good news is that it seems at least some of those concerns have been taken on board. The Autumn Statement confirmed that with effect from 6 April 2018:

• The employer NI and income tax treatment will be aligned, so a termination payment which benefits from the £30,000 income tax exemption will be subject not only to income tax on the excess over £30,000 but also employer NI. This will increase the cost to an employer of making a termination payment of more than £30,000 by up to 13.8%. The existing employee NI exemption on termination payments will be retained, even if the payment exceeds £30,000.
• The distinction between the different types of payments in lieu of notice (“PILONs”) will be removed. All PILONs will be treated as earnings and subject to income tax and NI in full, regardless of whether or not they are contractual. 

But importantly, one of the Government’s further proposals has been dropped. This was a provision to ensure that any other benefits or bonuses that the employee would have received, if his employment had not terminated, would also be subject to income tax and NI in full. The apparent decision not to implement this will considerably simplify the forthcoming legislation. It is anticipated that the draft legislation will be published in December - we will keep you updated.

Other announcements

The Chancellor made a number of other announcements affecting employment tax in the Autumn Statement.  Many of these will help to ease the burden on employers, such as aligning the threshold at which employees and employers start to pay NI, and simplifying the PAYE Settlement Agreement procedures. 

Notably, it was also confirmed that the Government will be going ahead with its proposal to limit the benefits in kind that attract a favourable tax and NI treatment when provided via a salary sacrifice arrangement. This will take effect from 6 April 2017. Some key benefits will not be affected, such as contributions to pensions, cycle-to-work schemes and employer-supported childcare. Arrangements in place before 6 April 2017 will be protected until 6 April 2018. To take advantage of this, employers will need to ensure that their scheme has been fully implemented before the start of the next tax year.