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12 December 2016
Draft legislation on termination payments – background
The revised draft legislation relating to the new regime on the taxation of termination payments, which is due to apply from April 2018, was published on 5 December 2016. This follows the announcement of its introduction in the Autumn statement and a period of consultation thereafter – see https://www.etctax.co.uk/proposed-changes-termination-payments-april-2018-simplification-complication/.
What is apparent, (and will be a relief for many), is that the draft legislation appears to be a simplified version of the original proposal.
For example, when first announced at the Autumn statement, the proposal was that “expected bonus income” would be treated as fully taxable. This would potentially have led to significant complexity and potentially also some very unfair results.
However, as far as the draft legislation is concerned, the process is actually quite straightforward; in that the amount of “basic pay” which would have been paid during any unworked portion of an individual’s notice period is compared with the aggregate amount paid on termination, and to the extent that the latter exceeds the former, it will qualify for the £30,000 exemption.
(This does away with the previous distinction between payments in lieu of notice, which were treated as contractual, and therefore taxable, and those treated as non-contractual and therefore eligible for the £30,000 exemption; a distinction which was not always easy to make).
“Basic pay” is, broadly speaking, determined by reference to the amount of pay received in the year prior to the termination. However, it excludes any overtime, bonuses, commission and the amount of any taxable benefits. (Basic pay also includes any amount waived by the relevant individual during that year). The idea is that “basic pay” will reflect the amount of ‘basic salary’ which the individual would have earned during the unworked portion of his notice period, but does not take into account any variable amounts of income they might have received.
One problem with the legislation as drafted, however, is that it would currently seem to include any amounts taxable as employment income during the period prior to termination which arose on, for example, the exercise of share options (or otherwise under the employment-related securities regime). It would appear that this was not the intention; and we would therefore expect this to be addressed before the legislation comes into force in April 2018.
Apart from the changes detailed above, the new legislation is much the same as anticipated – with the other principal changes being the application of employer’s NIC will apply to termination payments not within the £30,000 exemption; and the abolition of foreign service relief.
If you require any assistance in the area of termination payments, or indeed on any other aspect of employment taxes, then please give get in touch