Tax on termination payments consultation

24 July 2015 new consultation on simplifying tax treatment of termination payments, includes the possibilities of:

  • Removing distinction between types of payments
  • Replacing £30,000 allowance with exemption for redundancy
    • after 2 years’ service
    • amount of exemption increasing with service
  • New exemptions for wrongful dismissal, unfair dismissal and discrimination claims
  • Not where there has been a resignation

Current law (ITEPA)

  • Ordinarily tax payable under s62 (includes contractual payments)
  • Payments on termination taxable under s401-s416
  • £30,000 tax free if otherwise not chargeable to tax (s401-404A) e.g:
    • Damages for wrongful dismissal and payments on account of damages
    • Compensation for unfair dismissal or other breach of statutory rights
    • Payments of statutory and non-statutory redundancy
    • Contractual redundancy payments
    • Ex gratia payment
    • Non-contractual benefits in kind provided on termination

Miscellaneous

  • Restrictive covenant payments – taxable under s225/226
  • Injury/disability – exempt s406
  • Changes to terms and conditions – very likely taxable
  • Injury to feelings from discrimination – tax free
  • Legal fees – exempt s413A
  • Outplacement – exempt s310
  • Grossing up over £30,000

Very dangerous to pay tax free where there is a discretionary PILON clause:

  • Need to show breach and not a payment under contract
  • Amounts need to be calculated as damages e.g.
    • Salary and benefits
    • Reduction for mitigation and accelerated receipt
    • Breach/termination to have already occurred
    • Characteristic/name of payment – not PILON
    • Genuine cases only