Tax - Post termination issues

Key Points

  • Employers and tax advisers will at times need to consider the tax treatment of lump sum payments made to employees. The terms ‘compensation payments’ or ‘termination payments’ are typically used as a generic summary for such payments, normally made to an employee at the time the employment comes to an end. The term will encompass redundancy payments, ‘golden handshakes’, payments in lieu of notice, compensation for loss of wages and a range of other similar payments
  • Depending on the nature of the payment, it may:
    • be taxable under as a payment or benefit earned from employment as defined by section 62 Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003) 
    • Fall as a restrictive undertaking to be taxed separately (s. 225)
    • if it is not otherwise chargeable to income tax, fall within s 401-s416  ITEPA 2003 as a payment or benefit made in connection with the termination of employment with the result that below the threshold of £30,000 payments do not count as employment income and may be paid free of tax: or
    • Fall as a statutory redundancy payment ( s 309); or
    • Fall as an employer-financed retirement benefits scheme payments (s. 394); 
  • On 24 July 2015 HM Treasury published a Consultation on the simplification of the tax and national insurance treatment of termination payments. On 10th August 2016, the government response was published and a further consultation launched on draft legislation. In December 2016, the Government published draft provisions  for the Finance Bill 2017 to enact the proposed changes.The Overview document which was published with the draft regulations announced that the measures will take effect from 6 April 2018. In the event the proposals were dropped from the Finance Act 2017 as it was hastened through Parliament as a result of the calling of the general election in April 2017. 

  • The Finance (No. 2) Act 2017 finally hit the statute book in November 2017 and section 5 provides for treating all payments in lieu of notice as taxible and that payments for injury to feelings fall outside the exemption for injury payments, except where the injury amounts to a psychiatric injury or other recognised medical condition.These changes took effect from 6 April 2018. However in the November 2017 budget, it was announced that the reforms to the NICs treatment of termination payments would take effect from April 2019 (one year later than anticipated) and Budget papers for 2018 provided that the measure has  been delayed for a second time and will now take effect from April 2020

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