WELCOME TO CHARLES RUSSELL SPEECHLYS.
We would like to place strictly necessary cookies and performance cookies on your computer to improve our website service.
Otherwise, we'll assume you are OK to continue. Please close this message
On 31 July 2014, the Office of Tax Simplification (OTS) published its final report into its review on taxation of employee benefits and expenses. It was agreed between the OTS and Treasury Ministers in 2012 that the OTS should conduct this review with the aim to simplify the legislation and improve HMRC's administration. The final report (following two previous reports in August 2013 and January 2014) has suggested the removal of the £30,000 tax exemption for compensation payments on termination of employment.
The current rules have been criticised for being misleading and confusing, leaving some people under the false impression that the first £30,000 of any termination payment will be tax free. The tax relief does not automatically apply to all payments on termination. The circumstances and nature of the payment need to be considered to establish which part, if any, is exempt from tax. It is only if the payment is not otherwise chargeable to tax, that the tax relief up to £30,000 be applied. For example, if the payment derives from the employment contract (eg notice pay, bonus, commission or holiday pay), it is taxable in the normal way as it is an "emolument of the employment".
In the long term, the OTS has suggested the following changes:
The OTS report made further recommendations including:
Even if these proposals are accepted by the Government, the OTS commented that they are not likely to be introduced in the near future. While the best way to simplify the tax treatment of termination payments would be through legislation, it is unlikely that any decisions on the proposed amendments will be made before the next general election. The Government has not yet expressed its views on these proposals.
In the interim, it is likely that HMRC will improve its guidance on when tax relief can be applied on termination. In particular, that employers who routinely make payments in lieu of notice, without deducting tax on the first £30,000, should, most likely, be deducting tax. In these circumstances, there is most likely an implied right reserved to the employer to make a payment in lieu of notice and therefore such payment will be chargeable to tax as normal.
This article was written by Emma Bartlett, Kirsti Laird and Tom Vosper.