Currently, employees may receive the first £30,000 of any
termination payment free of income tax and national insurance
contributions (NICs) as long as they are not receiving a payment
pursuant to their contract of employment.
It was announced in March 2016 that termination payments which
are subject to income tax on any amount in excess of £30,000
would, in the future, also be subject to employer NICs. HM Revenue
and Customs (HMRC) has now published draft regulations which
introduce changes that will be part of the Finance Bill 2017 and a
future National Insurance Contributions Bill. The following changes
are expected to apply from April 2018:
all payments in lieu of notice will be treated as earnings and
will be subject to income tax and NICs regardless of whether they
termination payments in excess of £30,000 will be subject
to employer NICs, but the whole termination payment will remain
outside the scope of employee NICs;
payments for "injury to feelings" will be excluded
from the general exemption for injury payments, except where they
relate to a psychiatric injury or a recognised medical condition;
the foreign service exemption (for employment outside the UK)
will be abolished (with the exception of seafarers).
The good news is that the changes are likely to streamline this
previously complex area and make it more simple. The continuing
benefit for those receiving a termination payment, according to the
draft legislation, is that the first £30,000 of any payment
received will remain free from income tax and no part of their
termination payment will be subject to employee NICs.
The precise wording of the draft legislation is open for
consultation until 5 October, however the proposed developments may
make terminating employment more expensive for employers for two
reasons. First, employers are likely to experience increased
liability for NICs. Second, employers may have to offer increased
financial packages to counter the lower net figure exiting
employees are likely to receive under the new proposals. Therefore,
we may see any planned terminations brought forward in order to
benefit from the current regime until April 2018.
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