There are occasions when employers are entitled to offer a tax free termination payment to employees that are leaving the business, redundancy is one time and payments through settlement agreements are another. Unfortunately there have been some complications with the decisions as to what is and what isn’t taxable, mostly caused by varying interpretations of the legislation. In order to clear this up HMRC are proposing new legislation which they intend will come into force in April 2018.
When dealing with taxation of termination payments, in general there is no tax to pay on compensation payments of £30,000 or less.
Currently if there is no Payment in Lieu of Notice (PILON) clause in an employees contract an immediate breach i.e termination without notice, then any payment made with regard to notice is compensation rather than wages and is therefore tax free, this is also a benefit for the employer and no employer’s NIC is payable. However, this is the area that has caused the most concern for HMRC and the new legislation is designed to make sure that all notice payments, whether or not there is a PILON clause , will be taxable as wages.
Although tax has to be paid on termination payments over £30,000, usually paid at the OT code, there is no requirement for employer’s NIC, this is to change and NIC will be payable on all payments above £30,000.
Another area of change is on the taxation of payments for Injury to Feelings, currently there is an argument that such payments are tax free, under the new legislation all such payment will be taxable.
It will all be clearer, certainly, but no doubt more expensive for employers and better for the treasury.
If you are considering a settlement agreement or need to make redundancies, please contact our employment law experts on 0115 988 6211 for advice and information on taxation of termination payments