Government to consult on the tax treatment of termination payments

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Currently, the first £30,000 of any non-contractual termination payment can be paid without any deductions for tax and national insurance.

The Government is considering:
  • removing the distinction between contractual and non-contractual payments so that, for example, a contractual provision for payment to be given in lieu of notice which is currently taxable, would attract tax-free status.
  • allowing the current fixed £30,000 tax-free sum to change to an amount which increases with length of service
  • introducing a qualifying period of two years before an employee is eligible to receive a tax-free termination payment
  • making injury to feelings awards which are generally tax free subject to tax for at least some, if not all, of the award.
The consultation document has not given specific amounts but gives an example as follows:
  • £6,000 tax-free sum after two years’ employment, increasing by £1,000 for each additional year of employment.
If this is ultimately implemented, employees are going to see a considerable reduction in the amount of tax-free payments available to them when their employment is terminated.

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