Skip to main content
Insight

Termination payments – should the current £30,000 tax exemption be scrapped?

Nick Thorpe
13/08/2014
The Office of Tax Simplification (OTS) has recommended fundamental change to the current tax system on termination payments. In its final report on employee benefits and expenses, the OTS has The Office of Tax Simplification (OTS) has recommended fundamental change to the current tax system on termination payments. In its final report on employee benefits and expenses, the OTS has recommended that the current £30,000 tax exemption on termination payments should be scrapped and replaced with a new income tax relief which would only be available in circumstances where an employee qualifies for a statutory redundancy payment.

The new relief would apply to all payments linked to the employee's termination – regardless of the nature of the payment – subject to a multiple of the statutory redundancy payment to which the individual is entitled or alternatively, a flat amount. The relief would therefore extend to contractual payments in lieu of notice (PILONs) and "auto-PILONs" for those made redundant.

On the face of it, the OTS' proposal would simplify the tax treatment of payments made to employees in a redundancy situation, particularly in circumstances where they are not required to work their notice period and receive a PILON. However, it would also deprive a large number of employees the benefit of a valuable exemption in circumstances where their employment is terminated for reason other than redundancy, and could potentially make settlements more costly.

It would also potentially increase the level of awards made for wrongful and unfair dismissal, discrimination and protective awards as such awards may no longer qualify for tax relief.

This could, therefore, be a very significant and costly change for employers, who would ultimately end up footing the tax bill.

There was a suggestion in the OTS' interim report that the current £30,000 tax exemption should be increased (as it has been fixed at this level since 1988), but the OTS ruled out this possibility in its final report. Indeed, it went further and suggested that if a blanket exemption is retained and extended to cover all payments made in relation to the termination of employment, then the exemption may need to be set at a much lower level and, as a consequence, be of limited benefit.

So, will the £30,000 tax exemption be scrapped any time soon?

The OTS recognised in its final report that its recommendation on the taxation of termination payments would involve a fundamental change to the current system and would require extensive consultation, and with a General Election coming next year, it is unlikely to see the light of day for some time.

But the current exemption's days may well be numbered.

The OTS final report, at 88 pages long, makes for some light Summer holiday reading. For those of you who are about to go on holiday and may be interested in reading more, here is a link to the report.

Sign up to our email digest

Click to subscribe or manage your email preferences.

SUBSCRIBE