£30,000 EXEMPTION ON TERMINATION OF EMPLOYMENT SET TO GO

The subject of taxation of payments on termination of employment has long been a minefield with the various elements making up a termination payment being subjected to different tax and national insurance treatment.

Booth Ainsworth suggest that most employers want to pay the correct amount of tax but complexities of the system often prevent this from being achieved. On the other hand, HMRC finds that some employers and advisors manipulate the nature of the payments in order to enjoy the current £30,000 exemption and therefore avoid the tax and/or national insurance. There is a misconception that Compromise Agreements are a ‘golden goose’.

The Office of Tax Simplification (OTS) is currently carrying out a consultation, which will run for three months and the main considerations are:

• Alignment of the tax and national insurance treatment.
• That terminations payments be treated as earnings and subjected to both tax and national insurance via the payroll process.
• The introduction of a new exemption linked to redundancy. The exemption could increase proportionately by the number of years of service, excluding the first two years.
• The introduction of a new exemption for compensation payments for unfair/wrongful dismissal or discrimination awarded by a Tribunal. There may be differentiation between arrangements with the employer and employee with regards to payments for the same reasons.
• Current exemptions relating to injury or disability payments and to members of HM Forces to remain.

But according to Booth Ainsworth’s expert Dawn Foren-Smith, one thing is for sure, the current £30,000 exemption will be gone.

New anti-avoidance proposals forming part of the consultation are:

• Exemptions  not to apply to any part of a termination payment relating to a salary sacrifice arrangement.
• Exemptions not to apply to workers on fixed-term contracts.
• Exemptions not to apply if a worker is re-engaged by the same company (or associated company) within 12 months.

Please contact Dawn Foden-Smith on her direct dial 0161 475 1532 or email if you would like further information about this topic.