Employment Cases Update

Tax on termination payments: draft legislation has been published

Date published: 15/08/2016

Reform of the taxation of termination payments from April 2018

A consultation document published by the Government in July 2015 set out a number of ideas for the reform of the tax treatment of termination payments. As a result of that consultation, draft legislation has been published and you can read it here. The new legislation is expected to come into force in April 2018 - consultation on the new legislation will run from 10 August 2016 to 5 October 2016.

In brief, the changes are as follows:

  • No change to the £30,000 tax free sum;
  • Employer NI will become payable on any sum exceeding the £30,000 tax free limit (although employee NI will not be payable as is currently the case);
  • All PILONS (whether contractual or non-contractual) will be taxed as earnings and subject to Class 1 NICs;
  • Awards for Injury to feelings award will be taxable. HMRC has specified that in order for the exemption to apply there must be an injury or disability of a physical or psychological nature that is sufficient to cause the employee to be unable to perform his or her job properly.

Fortunately, the idea that the tax free sum should be linked to the employee's period of continuous service has been scrapped. This was hardly going to make the grossing up calculation any easier!

Remember that the Employment Claims Toolkit already does the grossing up for you, and you can specify whether injury to feelings will be taxed (and therefore potentially grossed up).

And the new edition of the Employment Tribunal Remedies Handbook 2016-17, still just £40 + P&P, lists all the remedies available along with worked examples (grossing up included) and 40 tables of rates, caps, NMW, tax and NI rates, fees and much much more. The book is available to buy here and our offer of the free digital version is open until 29 August 2016.