The government is consulting in respect of the tax treatment of termination payments, with the aim of simplifying the tax on termination payments, in the interest of greater certainty.

The government is considering:

• Removing the different treatment of contractual and non-contractual payments. In general, the current position is that contractual payments are taxable whereas, non-contractual termination payments are not. The changes currently being considered would mean that both the contractual and the non-contractual elements of termination payments would be taxable, albeit, subject to some level of tax exemption.
• Which situations should attract a tax free exemption.
• The possible introduction of a two year qualifying period, before employees can enjoy a tax exemption on termination payments and a scale where the extent of the tax free exemption increases proportionately with each year of service over and above two years service.
• One hypothetical worked example, in the consultation document, provides for a tax exemption for the first £6,000 of any termination payments where employees have two years’ service, with a proposal that the tax free allowance then increases by £1,000 for each subsequent year of service.
• Whether termination payments should become taxable, in the event that the employee is re-engaged to do a similar job for the same or an associated employer within a twelve month period.

Whilst a level of simplification of the tax treatment of termination payments would be welcomed by many, this may be easier said than done. It is likely that the measures currently being considered, would increase the tax to be paid on termination payments in most cases.

The consultation period is due to end on 16th October 2015.

For further details contact Louise Purcell, Senior Associate Solicitor

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