Termination payments and tax simplification

7 August 2015

The Government is consulting on simplifying the tax treatment of termination payments.

Presently, the first £30,000 of a non-contractual termination payment is free of tax and national insurance.

According to gov.uk, the government “is considering how they can make the tax and National Insurance contributions (NICs) treatment of termination payments simpler and fairer and wants to hear your views on how that can be achieved”.

The changes they are considering include:

• Removing the distinction between contractual and non-contractual termination payments
• Introducing a two year qualifying period for receiving a tax-free termination payment
• Whether the income tax and National Insurance treatment of termination payments should be aligned
• Making injury to feelings awards subject to tax
• Changing the fixed £30,000 tax-free sum to one which is dependent on length of service

While it is not stipulated how much the government is proposing to reduce the threshold to, it is safe to assume the reduction will be significant.

The deadline for the consultation is October 16 2015. The consultation is available in full here.