A recently launched government consultation on simplifying the tax and National Insurance treatment of termination payments should help to clarify a complex area of the tax system for employers says Wolters Kluwer’s tax and payroll experts.
The Simplification of the Tax and National Insurance Treatment of Termination Payments1 published on 24 July 2015 outlines government proposals, including:
- removing the distinction between contractual and non-contractual payments (so that, for example, a PILON payment would also attract tax-free status)
- changing the fixed £30,000 tax-free sum to an amount which increases the longer an employee has worked
- introducing a two year qualifying period, so no employee can receive a tax-free termination payment unless they have been working for two years
- making injury to feelings awards subject to tax for some or all of the award.
Presently the first £30,000 of any non-contractual termination payment is free of tax and national insurance.
Commenting on the proposals, Martin Jackson, CCH Tax and Payroll Advice Team Leader at Wolters Kluwer says: “I am generally in favour of these proposals if they add clarity to the system; currently some aspects are not clear and rely on inconsistent case law. In addition, it never made sense to have a fixed exemption regardless of salary or length of service, and it has been open to abuse as a result.
“Of course, it will very much depend on how much the new exemption will be per year. It would be grossly unfair to introduce something which represented an overall reduction in the allowance. Bearing in mind that the £30k tax free threshold has been in place since the 1990s I would be hoping for some sort of overall increase. So although there will clearly be some losers (those employed for a short time) there ought to be some winners too (long term employed).
“I welcome the move to simplify the treatment of PILONs as this has been the most common issue for many years. There is considerable case law but it is very difficult for the average employer to determine their liability (if any). Similarly, injury to feelings has always been extremely contentious though relatively rare. HMRC has invariably attempted to tax these payments and taxpayers have had variable but limited success in fending off attacks. Clarity is to be welcomed.
“However, I definitely don’t agree with the imposition of a 2 year qualifying period. It is very easy to come up with situations where this would be iniquitous or unfair – for example suppose I gave up a long term, well-paid steady job to accept a seemingly better-paid and safe job offer, only to find that it peters out after a few months leaving me high and dry... I’m going to need some proper compensation I think.”
The consultation will run from 24 July to 16 October 2015.