You may remember that over a year ago Parliament in Westminster announced that it was to seek to consult on how payments on termination of employment were to be taxed and subjected to national insurance contributions. The results of consultation have, this week, been announced:
- All notice monies will be taxable, whether they are paid further to an express payment in lieu of notice clause or not. Class 1 national insurance contributions will apply.
- Severance payments will continue to be free of tax and NICs (both employer and employee) where the severance payment is a genuine non-contractual payment (sometimes referred to as compensation or an ex gratia payment).
- Making the element of any severance payment that exceeds £30,000 subject to employer national insurance contributions (but not employee).
- Ensuring that payments attributable to injury to feelings are taxable.
Many employers will consider making exit payments, be they further to redundancy and/or restructuring programs, or in the case of settlement agreements reached further to protected conversations. Understanding the tax implications – and therefore the cost attributable – is always important.
Although these changes are not likely to take effect until April 2018, it's going to be important for employers to review policies on exit payments (including redundancy payments) well in advance of that date in order to understand the implications for them.
There may be ways to minimise the impact of these changes through structuring exit arrangements in a different way; there may need to be a move away from having people receive their notice as a payment (as it will be very expensive to do so in comparison to the existing position on exiting a person who does not have a payment in lieu of notice clause, who can receive a tax free lump sum) and there will be a need to review the employment contract in place, to establish if the employer is able to either place the employee on to restricted duties or altered duties during a period of notice (which may prove better than to make an expensive payment in lieu).
There will also be the need to understand when the tax change takes effect and to make sure that planning programs or changes can be carried out at the most efficient time, as it may be financially better to accelerate change.
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We can help by explaining these proposals further and helping you to assess how the changes may impact your business, together with reviewing any policies and contracts, and associated documentation, that you have in place. Please contact one of our employment team to discuss.