Posted on by Jessica Peaty

Tax changes to termination payments

The Government has recently announced that they’re cutting back on plans to tax termination payments. The payments are a severance payment arranged for staff upon termination of their contracts. This could be because of retirement, dismissal or redundancy.

In the proposed changes, the government states it wants to keep the exemption on the first £30,000 of termination payments. The main talking point of the change is that of PILON (pay in lieu of notice) payments. The changes now want those payments to be fully taxable.

This differs from the current laws, where non-contractual PILON payments qualify for the £30,000 tax exemption. From April 2018, all PILONs will not be eligible for the tax exemption.

Certain elements are being removed from the exemption. New exclusions include departure due to harassment or discrimination, and foreign relief service income tax. The changes are being criticised as unfair, and serving to increase the stress and complexity of leaving a role for whatever reason.

As the changes are set to take effect in April 2018, now should be the time that employers think more about their termination packages. While the changes aren’t due for over a year (and possibly beyond if the change is met with overwhelming criticism), we expect the new set of rules will affect larger businesses in a variety of ways. For example, if you’re expecting to lay off some staff, or parting ways with a number of employees through other means.

It would be wise for large businesses to read up on these tax reforms, so they can best prepare well ahead of when they come into effect. The changes are set to make termination payments more costly than they currently are. You may be expected to offer leaving employees a higher grade of termination package, to offset the overall lower figure they’re likely to receive under the new laws.

Employers may also want to put a tax indemnity in place for when staff are terminated. This will ensure that both you and the employee are sharing the same information on what they’re going to be paid upon exit. Much like the upcoming apprenticeship levy, however, many employers might view the termination payment tax changes as another irksome increase to costs.

Many employers might also view the changes as a welcome simplification of a confusing set of rules, but it’s a streamlining that does come at a cost; time will tell if the changes are truly worth it.

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