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Taxing Terminations

Posted on 18 March 2016

Taxing Terminations

HMRC currently allows employers to pay the first £30,000 of certain termination payments free of tax.  Any amount over the £30,000 would be subject to income tax, but not national insurance contributions (NICs). 

Some time ago, the Government consulted about possible changes to this system in order to simplify it.  Many of the responses to the consultation condemned the proposals as overly complex and retrograde.  Instead, the Government announced in this week's budget that, from April 2018, termination payments over £30,000 will be subject to employer NICs, as well as income tax.  Employees will not be liable to pay national insurance contributions on the payment.

This will make the cost of settling disputes with employees more expensive for employers.  While it would not be lawful to require employees to pay employer NICs, we imagine that the cost to the employer will be factored into any calculation as to the 'pot' of money available to the employee.  While this could curb unnecessarily large payouts, it may lead to more litigation from employees who are unhappy about the amount of compensation offered to them.

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