More funds for HMRC – but employers are likely to pass on the cost

The government has published its response to the consultation on how termination payments should be treated for the purposes of tax and National Insurance contributions (NICs) from 2018. The key changes are

• Making the tax and NICs consequences of all post-employment payments consistent. So all payments received in lieu of working any period of notice, whether contractual, or non-contractual, will be subject to income tax and Class 1 NICs
  
  
• Employer NICs will be payable on payments above £30,000 (which are currently only subject to income tax)
  
  
• Abolishing the foreign service relief exemption for termination payments
  
  
• Clarifying that the tax exemption for payments for injury does not apply in cases of payments for injury to feelings (in discrimination cases) and is only available where the injury relates to a condition that has a real impact on the employees ability to work.

The Government’s consultation response stresses that, in order to help those who lose their jobs, the first £30,000 of any termination payment (if not otherwise chargeable to tax) will remain exempt from income tax, and from employee NICs. Suggestions that the amount of the exemption should be reduced, or increased, did not meet with approval.

Whilst there is the opportunity to respond to these proposals by 5 October, it is unlikely they will change. So, what are the consequences for settlement negotiations?

• First, employers will have to accept a rise in the cost of all terminations equal to the employers NICs payable (currently 13.8%). This could result fewer settlements or the additional cost being recouped from the amount paid to employees
  
  
• Second, the only reason for not having the protection of a contractual PILON was the tax saving which if lost will mean that there is no reason not to have a PILON in all contracts. As PILONS reflect base salary and not the value of benefits it is again likely the value of any termination payment will be reduced
  
  
• Third, the loss of the foreign service relief will mean that many employees working for their employers abroad will lose what was a valuable benefit
  
  
• Finally, the loss of the tax relief for injury to feelings will result in making it more difficult to settle cases of discrimination as the tax fee payment is a valuable means of finding a compromise between the employer and the employee.