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As Geoffrey Richards reported the government started consultation on the tax/NIC treatment of termination payments in the summer of last year. A year later, its response has been published, along with draft legislation. The changes are anticipated to take effect next year (probably in April) and cover:

- Clarification of the scope of the exemption for termination payments, making the tax and NICs consequences of all post-employment payments consistent. To do this, the Government will tax and subject to Class 1 NICs any payment that the employee would have received if he or she had worked his or her notice period, even if the employee is asked to leave employment immediately or part way through their notice period. This will effectively make all PILONs taxable and subject to Class 1 NICs;

- Removal of the foreign service relief exemption for termination payments. This is currently a valuable exemption for those who have spent parts of their careers abroad;

- Resolution of the current debate about tax treatment of injury to feelings awards – the exemption for injury will not apply to injured feelings;

- Alignment of the rules for income tax and employer NICs, so that the latter will be payable on payments over £30,000 (currently subject to income tax alone).

There is no move to chip away at the income tax exemption on the first £30,000 of an ex gratia termination payment, and similarly, the whole of a termination payment will be exempt from employee NICs.

Anyone who wishes to comment on the draft legislation can find it here, and should submit their response by 5 October.

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