Budget 2016: NI treatment of termination payments for employers

16 March 2016

Today's announcement that from April 2018, tax and National Insurance (NI) treatment of payments made by employers when they terminate employees is to be more closely aligned, is welcome news. It suggests that some of the more complex proposals floated by HMRC in their recent consultation on this issue have not been taken further at this stage.

The headline announcement means that employer's (but not employee's) NI will be charged on all termination payments that exceed £30,000 in the future.  This will be an additional cost to employers - potentially making these redundancies much more expensive in the future. This is clearly not the end of the complex treatment of termination payments, which continue to evolve - had the £30,000 exemption kept pace with earnings it would now be in excess of £72,000.

HMRC are also planning on consulting on wider changes to the tax and NI treatment of termination payments including:

- abolishing the Foreign service exemption, which eliminates or reduces tax on termination payments where an individual has worked overseas;

- taxing Payments In Lieu of Notice (PILONs) irrespective of whether they are contractual in nature or not; and,

- bringing in new rules to prevent contractual termination payments being "disguised" as damages in order to avoid tax and NI on them

In light of these changes and the increased costs that will result, employers may well decide to bring forward any senior management restructuring exercises into 2017 rather than wait until the new rules apply from 2018.


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