Tax treatment of termination payments
Tax treatment of termination payments
Mon 12 Feb 2018
There have been some recent changes to the employment tax treatment of termination payments, and it is important to understand the commencement dates. The notes below provide some further information on the impact of the changes and the commencement dates.
Termination payments and F(No2)A 2017 changes
F(No2)A 2017 s.5 contained provisions amending the tax treatment of termination payments from 6 April 2018. The measure aligns the rules for tax and secondary National Insurance contributions (employer (NICs)) by making an employer liable to pay NICs on termination payments they make to their employees.
Prior to the change there was an exception from income tax on an individual receiving up to £30,000 in the form of a non-contractual payment in lieu of notice. In addition for the whole amount (whether below or above the £30,000 threshold), there was no employees or employer’s NI. This lead to termination payments being structured as far as possible to ensure the £30,000 threshold was available and that the payment was regarded as non-contractual to minimise any NI costs.
Following the change, tax and national insurance is due on any non-contractual payment in lieu of notice payment that is not a statutory redundancy payment. The change occurs for termination payments where the termination award is made on or after 6 April 2018. HMRC has confirmed that where the termination was made before 6 April 2018, but paid after 6 April 2018, the pre 6 April 2018 rules will apply. An illustration of the difference is given in the table below for a termination package for an individual within the 40% income tax bracket (not exceeding the £100k or £150k income tax thresholds) consisting of the following amounts:
| Pre 6 April 2018 termination | Post 5 April 2018 termination | ||||||
| Income tax | E’es NI | E’ers NI | Income tax | E’es NI | E’ers NI | ||
| Statutory redundancy | 5,000 | 0 | 0 | 0 | |||
| Holiday pay | 2,000 | 800 | 40 | 276 | 800 | 40 | 276 |
| Non-contractual PILON | 33,000 | 3,200 | 160 | 0 | 13,200 | 660 | 4,554 |
| Total | 40,000 | 4,000 | 200 | 276 | 14,000 | 700 | 4,830 |
| Net pay to employee | 35,800 | 25,300 | |||||
| Cost to employer before tax relief | 40,276 | 44,830 | |||||
Changes to foreign service relief F(No2)B 2017-19
There is a further change to termination payments included in F(No2)B 2017-19 clause 10, which amends foreign service relief. Currently if a termination payment is made for a UK resident individual and the individual satisfies the foreign service relief conditions, the termination payment is not subject to tax under chapter ITEPA 2003 part 6 chapter 3 (termination payments).
On the assumption the new legislation is enacted as drafted, where termination date is on or after 6 April 2018 and the payment or other benefit in respect of that termination is received on or after 13 September 2017, the foreign service relief provision will only apply to a UK resident individual:
- If the individual is non-resident in the tax year in which the employment terminates; or
- The payment or benefit is in respect of a change of duties or earnings with the same employer.
For a further discussion of the employment tax treatment of termination payments, please get in touch with a member of the Mazars employment tax team.
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