Changes in the pipeline as HMRC seeks to ensure rules are ‘fairer’.

Many employees have traditionally benefited from the ‘legendary’ £30,000 termination payment as it has always been assumed that it would always be tax free.


The legislation governing this has always been complicated and HMRC has been concerned that the rules ‘should be fair and not open to abuse or manipulation’.


This normally results in some sort of clampdown on taxpayers and sure enough in the summer of 2015 it launched a consultation on simplification of the tax and national insurance treatment of termination payments. This was followed by draft legislation (being part of the summer 2016 Budget) which included the following main objectives:

  • clarifying the scope of the exemption for termination payments to prevent manipulation, by making the tax and National Insurance contributions (NICs) consequences of all post-employment payments consistent
  • aligning the rules for income tax and employer NICs so that employer NICs will be payable on payments above £30,000 (which are currently only subject to income tax)
  • removing foreign service relief
  • clarifying that the exemption for injury does not apply in cases of injured feelings.

The most important part of these changes is contained in the first point. Clearly HMRC wants to limit the use of the traditional tax free amount. Unfortunately, to confuse matters the changes were included in the Finance Act 2017 which was delayed due to the general election. Finance Bill 2017 (2) explanatory notes highlights the areas that will be legislated and states:


Termination payments etc:

Authorises the Finance Bill to make provision in a future year about the tax treatment of payments or benefits received in connection with the termination of an employment or a change in the duties in, or earnings from, an employment.


The current situation

Many employees and accountants advising clients have long assumed that most lump sum termination payments would benefit from the tax free status. Although this has always been technically subjective, the rules have long been a minefield and this leaves all interested parties confused as to what does/does not count and exactly what exemptions may be due. Where the payment did not count it would be taxable under ITEPA 2003 s.62.


The situation is very confusing and HMRC has made it clear that it considers the existing rules can encourage manipulation by employers to take advantage of the exemptions and can encourage employers, in some circumstances, to change the nature of some payments so that they become termination payments, including remuneration such as bonuses which would normally be subject to tax and NICs.

What is impact of the changes?

The original consultation stated that HMRC wanted to ensure:

  • the tax system should continue to provide support to those who lose their job
  • the rules should provide certainty for employees and employers and be simple
  • the rules should be fair and not open to abuse or manipulation.

Clause 14 of the original Finance Act (2) 2017 introduced a number of amendments to ‘tighten and clarify the income tax treatment of termination payments’. These effectively alter the existing legislation and also add new sections 402A to 402E into Chapter 3 of Part 6 (Payments and Benefits on Termination of Employment etc) of ITEPA.


However, instead of clarifying the rules it might be argued that the amendments simply add another layer of uncertainty.  The detailed changes are beyond the scope of this article but the main issues are:

  • the new sections 402 a and b seek to clarify what is a termination benefit and exactly how it is treated/what exemptions it may attract.
  • the new section 402c sets out whether a termination benefit is to be treated as a redundancy payment
  • the new sections 402 d and e contain details of relevant calculations and the importance of dates of payment.


The effects of the above can be briefly summarised as:

  • if the payment is deemed to be a redundancy payment (redundancy as defined by Employment Rights Act 1996) then the £30,000 exemption still applies
  • if the payment is an approved contractual payment (a payment to a person on the termination of the person’s employment under an agreement in respect of which an order is in force under section 157 of ERA 1996 or Article 192 of ER(NI)O 1996) then there are still limited exemptions available
  • if the payment is deemed to be general earnings then it will probably be taxable in full as no exemption will apply
  • a new category of post-employment notice pay (PENP) is introduced. This is defined as the amount of a termination award which should be treated as general earnings (ie taxable). Effectively this seeks to reduce the use of the £30,000 exemption.


Employers and accountants advising clients need to be very clear about the new rules and whether or not payments are taxable. HMRC clearly wants to limit the use of the exemption and so employees’ expectations may not be met. There are obvious dangers in setting or altering the terms of the payments to try and benefit from the exemptions. Grey areas still exist including whether or not a payment is contractual and the status of emergency employment issues such as an employee being sent on ‘gardening leave’.

Article from ACCA In Practice