HMRC has published a piece of
draft legislation which attempts to simplify the current regulations
surrounding taxation of termination payments. The legislation is due to come
into force in April 2018 and is currently open to consultation until the 5th
of October 2016.
It has been suggested that the
overall complexity of the current tax rules in terms of termination payments
make the system overly open to manipulation, therefore, a number of
simplifications have been suggested.
Firstly, I will address changes
to PILONS. PILONs or payments in lieu of notice currently take two main forms,
contractual and non-contractual. Although almost identical in nature the fact
that one is contractual and one isn’t makes all the difference for tax
purposes. Currently if you are contractually entitled to a PILON it will be
subject to tax, however, non-contractual PILONs will not. This seems like an
arbitrary difference.
There are two ways to potentially
fix this situation but only one obvious one for HMRC. So, it will not come as a
surprise that they have proposed to make all
PILONs taxable regardless of contractual status. The distinction between the
two forms will stay for clarity’s sake but in terms of tax they will be treated
equally.
How this change will affect the
use of PILONs is yet to be seen, however, now that the loophole has been
plugged it certainly makes non-contractual PILONs less attractive from an
employee’s perspective. Overall it seems that the simplification of PILONs has
come at the expense of the employee, just how much expense is yet to be
determined and could potentially lead to employers being asked to increase PILONs
to account for the extra tax.
Secondly and probably most
importantly is the confirmation that the £30,000 tax free allowance on
termination payments will remain intact. This has been debated on numerous
occasions and it comes as a welcome surprise that it has emerged relatively unscathed.
However, a key change that has
been proposed is the introduction of employer national insurance contributions
on payments over £30,000. This change will mean that on any termination payment
over £30,000 employers will be liable to pay national insurance contributions.
This may seem irrelevant to employees at first glance but the implications
could be quite serious.
Two things seem fairly certain
with this change:
- Firstly, Employers will be less likely to want to venture over the £30,000 tax fee allowance in terms of payment;
- Secondly, if they do venture over the tax free allowance the tax is likely to impact the amount of settlement, meaning the employee may have to foot the NIC bill instead of the employer.
Given that the highest rate of employer’s
NIC in 2016-2017 is 13.8% that could constitute a large deduction from any
employee’s likely settlement. Overall I think it’s fair to say that if this new
procedure is introduced it will see employees disadvantaged in many cases.
Finally, the last major change is
the confirmation of taxation on injury to feelings awards. Currently there is
conflicting case law surrounding this subject which HMRC have attempted to
clarify by putting a blanket tax on all injury to feelings awards. Again this
is not ideal for employees, particularly since injury to feelings awards often
seek to compensate for some particularly horrendous treatment by employers. With
current income tax rates ranging from 0 – 45% this could significantly reduce
the settlement amount that the employee actually receives.
Clearly there is a price to pay
for simplicity and as the draft legislation stands it will likely be employees
paying the lions share, however, it is worth reiterating that this is merely
the draft legislation and much could change before the implementation date in
2018.
James Battle - Legal Assistant
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