Do you know the latest tax rules regarding termination payments?

There have been significant changes to the tax treatment of termination payments in the last 12 months. And the government have not finished yet, but the goal posts keep moving. To help raise awareness among local businesses, Alison Schreiber from The HR Dept, Durham shares a rundown of what’s happened and what’s still to come.

Compensatory termination payments up to £30,000 are normally tax free.

In April 2018 a loophole was closed meaning non-contractual pay in lieu of notice cannot be wrapped up in this £30,000 tax-free amount.

A further change due in April 2019 to make employer national insurance payable on any excess over £30,000 has been postponed by a year.

Alison explains: “It may be that the hardest part of terminating an employment is making the decision to do it. However, with all the tax changes going on, you’d be forgiven for thinking that the most difficult thing is calculating the termination payment. As a starting point, let’s bear in mind that the first £30,000 of a compensation in a redundancy payment or as part of a Settlement Agreement is normally tax free.

“Last April new rules closed a loophole which had seen some payments made in lieu of notice deemed free of tax if there was no clause in the contract allowing pay in lieu ‘That change has happened.

“Another rule change that was intended to come in last April was that, as well as the excess over £30,000 of compensatory payments being subject to tax, the employer should pay national insurance contributions on it too. This would correspondingly increase the cost to an employer of a termination payment.

“This change was actually postponed until April of this year. And the good news is it has just been announced that it has been postponed again and has been kicked into the long grass of 2020.”

These changes may affect the equilibrium of termination payments, potentially reducing the value to the recipient and/or increasing the cost to the employer. It’s important to consider this when negotiating a termination payment and to ensure your payroll systems are updated with the latest rules.