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New Taxation for Termination Payments in 2018

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New draft legislation has been tabled by HM Revenue & Customs with the hope of achieving a “simplification of the tax and National Insurance treatment of termination payments”. The Government have said that the current legislation regarding termination payments is “complex and can encourage manipulation by employers to take advantage of the employer NICs exemption.”

The legislation is not due to come into force until April 2018, but it is important people understand what changes will be made and what impact it could have upon them.

The most significant changes to be made are:

  • Payments in lieu of notice will now always be taxable. This is because they will no longer be considered as a termination payment, but rather as earnings. Therefore, payments in lieu of notice will be subject to income tax and National Insurance Contributions (NICs) whether they are contractual or not.
  • Termination payments that surpass £30,000 will require employer NICs and income tax on the value above £30,000. However, the first £30,000 of termination payments will remain exempt from income tax or NICs.
  • Payments made for injury to feelings will no longer fall under the exemption for payments for injury or disability. This is unless the injury amounts to a psychiatric or other medical condition. Therefore, payments for injury to feelings are subject to tax. This change is intended to end judicial conflict on the matter.

The wording of the legislation is open for consultation until 5th October. However, should you need advice regarding a Settlement Agreement, enquire with one of our employment lawyers today. Whether you’re an employer or an employee, call us on 0800 8321 554 or email info@klglaw.co.uk to arrange a free consultation.

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