Tax and termination payments

17 Aug 2016

Last year I wrote about changes to the rules concerning the taxation of termination payments. This has just arrived in the form of draft amendments to the Income Tax (Earnings and Pensions) Act 2003. There’s a consultation period on the text until 5 October and it’s proposed the new rules take effect in April 2018.

The riddle is to find a way of using the tax regime to support those who lose their jobs while achieving certainty within rules which are simple, fair and not open to abuse or manipulation.  The key parts of HM Treasury’s solution are to:

  • retain the income tax exemption for the first £30,000 of a termination payment.This threshold has been in place since 1988 and the Treasury says there is not a strong enough case to increase it “particularly given the additional exchequer cost”;
  • retain the exemption from employee NIC’s for payments relating solely to termination of employment but require payment of employer NIC’s on payments exceeding £30,000;
  • abolish the distinction between contractual and non-contractual PILON so they’re all taxable;
  • retain the current exemptions for payments for death, disability or other injuries but tax damages for injured feelings, commonly seen as one of the remedies for unlawful discrimination.

In the meantime the Treasury has today published a consultation paper on strengthening tax avoidance deterrents and sanctions.

This proposes penalties on “enablers of tax avoidance” going on to declaim “The Government is clear that it will act against users and enablers of tax avoidance…It proposes raising the stakes for those who design, market, or facilitate the use of avoidance by introducing sanctions, in line with HMRC’s penalty principles….”. Targets include IFA’s, accountants, company formation agents, trustees and lawyers.

The blurring of the subtle but important distinction between lawful tax avoidance and unlawful tax evasion is rather worrying.