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Consultation on Simplifying Tax Treatment of Termination Payments

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This is boring but important.

The government is consulting on simplifying the tax treatment of termination payments.

At the moment, the first £30,000 of any non-contractual termination payment is free of tax and national insurance.

The government is considering:-

- removing the distinction between contractual and non-contractual payments (so that, eg, 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 (which are arguably - albeit subject to inconsistent caselaw - completely tax free) subject to tax for some or all of the award.

Although the consultation document does not specifically set out amounts or thresholds, a worked hypothetical suggests a £6,000 tax-free sum after two years' employment, increasing by £1,000 for each additional year of employment. If this is the sort of level eventually implemented, it will mean a significantly reduced tax-free sum being available for almost all employees when their employment terminates.