The government is consulting on simplifying the tax treatment of termination payments – see here
At the moment, the first £30,000 of any non-contractual termination payment is free of tax and national insurance. Therefore, if the contract of employment says you will pay them in lieu of notice (which we always insert as a clause as it’s a useful tool to have) this is not a non-contractual termination payment and hence subject to tax. To be affected it would have to be a payment not mention in the contract, separately agreed at the termination point.
The government is considering:-
- removing the distinction between contractual and non-contractual payments (so that, e.g., a PILON – Payment In Lieu of Notice payment would also attract tax-free status)
- changing the fixed £30,000 tax-free sum to an amount which increases the longer an employee has worked
- introducing a two year qualifying period, so no employee can receive a tax-free termination payment unless they have been working for two years
- making injury to feelings awards (which are arguably - albeit subject to inconsistent case law - completely tax free) subject to tax for some or all of the award.
Comment: Although the consultation document does not specifically set out amounts or thresholds, if anything like the worked hypothetical becomes the sort of level eventually implemented, it will mean a significantly reduced tax-free sum being available for almost all employees when their employment terminates. It will be interesting to see what happens that’s for sure.
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