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Tax Treatment of Termination Payments – all change?

If there’s one certainty around terminations, it is that the first £30,000 is payable tax free, right?  Assuming it’s a genuine ex gratia payment, non-contractual, etc etc?  Right – but maybe that’s about to change.  I’m not sure of the genesis behind this (though I suspect it probably isn’t as simple as giving ‘an employee certainty about the amount of money [they] will receive when they lose their job’ as the Foreword suggests), but the government is now consulting on ‘simplifying’ the tax treatment of termination payments. Details of the consultation document can be found here.

The proposal – interestingly - is to consult on:-

  • the removal of the distinction between contractual and non-contractual payments (ie, a PILON could potentially be paid tax free);
  • adopting a sliding-scale payment based on length of service (no set amounts are specified in the consultation but the assumption has to be that much lower tax free sums are likely to be available for the majority of employees on termination) – so in other words, goodbye to the fixed £30,000 payment;
  • the introduction of a two year qualifying period for a tax free payment to be made;
  • making injury to feelings awards subject to tax in whole or in part.

Responses are invited by 16 October, and I’d be very interested to hear views on this!

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