Termination Payment Consultation | KPMG | UK
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Termination Payment Consultation

Termination Payment Consultation

A consultation has been released on the taxation of termination payments. Changes will be introduced from 6 April 2018.


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HMRC have released a consultation with proposals to simplify the taxation of termination payments in order to reflect the Government's view that the rules ‘should provide certainty for employees and employers’ and ‘should be simple’. However, the proposals may make life more complicated rather than provide for simplification, and an opportunity for true simplification seems to have been missed. In addition, the changes are likely to increase the cost for both employees and employers when an employment contract is terminated. This will apply, in particular, to globally mobile employees where additional cross-border complexities are almost certain to arise as a result of the abolition of Foreign Service Relief. It is important that employers are aware of what is proposed and plan ahead for the introduction of these new rules.

In determining the taxation of payments made when an employment is terminated, the UK has always made a distinction between a payment received under an employment contract and an ex gratia (i.e. voluntary) payment made on a termination. Payments in the second category may benefit from favourable tax and NIC treatment. The taxation of termination payments is regularly challenged by HMRC. This was recently demonstrated in the recent First-tier Tribunal (FTT) which ultimately found in the taxpayer's favour. The main changes are summarised below.

Taxation of Payments in Lieu of Notice (PILON)
Under current rules, if an employment contract contains a right to receive a PILON then the payment is regarded as being a payment of earnings and this is subject to tax and social security. If the contract is silent on this point and a contractual right to a PILON cannot otherwise be inferred, then the payment may be exempt (up to £30,000) and will not be subject to NIC (the whole amount).

From 6 April 2018, the distinction between contractual and non-contractual PILONs will be removed, although the distinction will remain for other payments related to termination. The proposals in the published consultation go further than this (and with exceptions) they will require that any payments, bonus or benefits, that an individual ‘could reasonably be expected to receive’ had he or she worked during the notice period will be fully subject to tax and NIC regardless of what actually happens.

National Insurance Contributions (NIC)
Currently a non-contractual payment made on termination of an employment contract is exempt from NIC. From 6 April 2018 this exemption will be removed and NIC will be due at 13.8 percent from the employer on payments that are also subject to income tax. This means that the amount in excess of £30,000 will become subject to employer NIC. However, the exemption from employee NIC will remain on the whole amount, where it is available.

Tax-free Threshold
Currently, the first £30,000 of a non-contractual termination payment is exempt from income tax. HMRC have confirmed that the £30,000 tax-free threshold will remain, and it will not be increased to take account of inflation since 1988.

Existing Exemptions
Currently there are several exemptions that may apply to take a non-contractual termination payment out of income tax where the payment is above the £30,000 threshold. The exemption that is of most interest to employers of globally mobile employees is Foreign Service Relief (FSR).
From 6 April 2018, FSR will be removed and any non-contractual payment will be subject to tax and employer NIC to the extent that the £30,000 threshold is exceeded. In addition, exemption for termination payments made in cases of injury or disability should not apply in cases of injured feelings.

To view the consultation click here.


For further information please contact :

Ian Goodwin

Mike Lavan

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