You may need to think again.

The Office for Tax Simplification (OTS) has been looking at the taxation of termination payments for some time with the remit that Government were concerned about the overly generous tax and NIC benefits of claiming a payment on termination of an employment was non-taxable using the legislation found in Section 401 ITEPA 2003.

Government announced in the April Budget 2016 that they would be looking at ways of simplifying the process for employers and following a consultation document published in the summer the Government confirmed at Autumn Statement 2016, that they will legislate in Finance Bill 2017 to tighten and clarify the tax treatment of termination payments.

The proposals are that all contractual and non-contractual payments in lieu of notice (PILONs) will become taxable as earnings which will require employers to tax the equivalent of an employee’s basic pay if notice is not worked.

Further legislation will be drafted removing Foreign Service relief for employees who have spent time working outside of the UK and confirm that payments for injury to feelings are subject to tax unless it relates to a psychiatric injury or another recognised medical condition.

Up until now National Insurance Contributions have not been due from the Employer or Employee on a termination payment regardless of whether the payment exceeded the £30,000 limit used for tax.

However legislation will be introduced in the NICs Bill 2017 to align the tax and employer NICs treatment of termination payments so that employer NICs will be payable on the elements of the termination payment exceeding £30,000 on which Income Tax is due. The first £30,000 of a termination payment will remain exempt from Income Tax and National Insurance.

According to government they have listened to employers and made a number of changes to make the rules easier for employers to operate. These changes include requiring the employer to calculate post-employment notice income on basic pay only.

It is anticipated that the measure will take effect from 6 April 2018.

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