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End of an era for tax free payments

A Shropshire accountant has warned that the era of tax free payments in relation to termination payouts could soon be over – and that staff and employers could both pay the penalty.

Pam Mason, of Dyke Yaxley Chartered Accountants, in Shrewsbury, said several changes to the way termination payments are treated for tax purposes were set to take effect in the coming months.

“The Government has said that the changes are intended to bring fairness and clarity to the taxation of termination payments, and to prevent anyone flouting the rules. The timescale has slipped though as the new rules were originally set to come into force next month, but now some won’t take effect until April 2019.”

Mrs Mason said under the current system, termination payments set out in an employment contract are subject to income tax and national insurance contributions. But non-contractual payments in lieu of notice are often treated as termination payments and are covered by a £30,000 exemption, and they are also not subject to national insurance contributions.

“Non-contractual payments have been a controversial area for some time where HM Revenue and Customs are concerned.”

Under the new rules though, the distinction between the two forms of payments will be removed, so they will both be subject to income tax and national insurance calculations.

“All companies providing termination packages will need to consider the implications of the new rules as there is likely to be a notable impact on the cost of such packages for the employer. And employees could also see the take-home pay from their termination package reduced significantly too.”

Mrs Mason said the new Post Employment Notice Pay (PENP) scheme had now been introduced, which identifies the amount of pay the employee would have received if they had worked their full notice period – this will then be excluded from the £30,000 exemption and taxed as earnings.

“Previously it had been announced that employers would be made to pay national insurance contributions on part of a termination payment exceeding £30,000 from April 6 this year. But the changes will now take effect from April 2019, which is good news for payroll providers and employers as it gives them more time to digest the complicated process and prepare for the new rules.”

Mrs Mason said that employees living in the UK in the tax year in which their employment is terminated will not be eligible for foreign service relief on their termination payments.


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