Taxation of termination payments – all change

The UK government has issued a reminder that the way in which termination payments are taxed has changed. This is a significant change that could potentially result in more tax being paid upon termination of employment.

Employers will now be required to pay income tax and class 1 national insurance contributions on a part of all termination payments, irrespective of their contractual status. The new rules are aimed to prevent employers from manipulating the contractual and payment system. Thus, from now on the tax and national insurance consequences are the same whether or not the employment contract allowed a payment in lieu of notice to be made.

The element now chargeable to income tax and national insurance is the amount of termination payment that represents payment in lieu of notice.

This change applies to payments, or benefits received on, or after, 6 April 2018 in circumstances where the employment also ended on, or after, 6 April 2018.

The rules introduce complex formulae for the calculation and specialist taxation advice should be sought in these cases.

The government’s note can be found here.

David Hoey is a partner at BTO Solicitors LLP.