Taxation of Termination Payments – An Update

United Kingdom

Changes to the tax and National Insurance Contributions (NICs) treatment of termination payments are due to come into effect from 6 April 2018. In summary, and the legislation is complicated, the key changes are that all payments directly or indirectly covering notice pay will be fully subject to tax and NICs, and all termination payments over £30,000 will attract employers’ NICs.

Since the process for putting these changes into legislation began, HMRC has announced two further changes.

The main change is one which has only recently been announced. The income tax and NIC changes were all meant to come into effect at the same time (ie 6 April 2018). However, the NICs changes will now come into effect on two different dates:

  • all income tax changes and all but one of the NIC changes will take effect on 6 April 2018, but
  • termination payments above £30,000 will only become subject to employers’ NICs from 6 April 2019.

This will therefore give all employers an extra year in which to make payments above £30,000 free of employers’ NICs.

The second change will affect fewer employers as it only affects employees who have overseas employment as part of their employment history. HMRC have said that foreign service relief (FSR) will after all be retained for non-UK resident employees but not for employees who are UK resident (with an exception for UK resident seafarers). Employers will also welcome this as, in appropriate cases, FSR – which can exempt either all or part of the payment from UK tax and NICs – can be an extremely valuable exemption. The payment may still not be completely tax-free, though, as it may still be taxable in another country even if escapes UK tax. 

Human Resources departments should carefully consider the impact of the changes to the termination payments regime coming into effect over the next few years. There could be substantially different after-tax and NIC treatments depending when payments are made.

We will be running a webinar in the New Year to run through the changes in detail and highlighting what consequences they may have for employers (and employees).

Click here to access our earlier Law-Now for a fuller discussion of the changes being made to the tax and NIC treatment of termination payments, and also access here a link to the recent HMRC announcement on the delay to the introduction of employers’ NICs on termination payments above £30,000.

For more information, please contact the authors of the article.