Capping public sector exit payments

25 June 2019

This article was featured in the July/August 2019 issue of the magazine.

John Harling, principal employment taxes consultant for PSTAX, reveals details of proposed secondary legislation to implement the cap

There have been calls over many years to restrict the level of payments on termination of employment in the public sector, because of the high costs involved to the taxpayer. According to the Treasury, exit payments totalling £1.2bn were made to public sector employees in 2016/17, of which £0.2bn were made in settlements at and above £100,000. 

Though legislation was introduced in the Enterprise Act 2016 to cap such payments at £95,000, draft regulations have only recently been introduced to give effect. It is likely that the actual implementation date will be after a consultation exercise concludes on 3 July 2019 as there is nothing in the consultation about retrospective application which was previously envisaged under a Private Members Bill. It is widely believed that the regulations are likely to remain as drafted, but the consultation is asking for comments on how the guidance could be expanded.

 

...exceptions being payments for death in service and on account of incapacity because of injury and illness

 

The proposed legislation define the types of payments intended to be subject to the cap, how the cap is intended to operate, and the scope of the regulations. It is the government’s intention to extend the scope to the wider public sector in due course with some exceptions. The regulations are the first stage in a process of implementation capturing most public sector employees.

The following categories of public sector employer are within scope of the draft regulations where they fall within the responsibility of the UK government, regarding their employment:

  • the UK Civil Service, its executive agencies, non-ministerial departments and non-departmental public bodies (including Crown non-departmental public bodies and Her Majesty’s Prison and Probation Service)

  • the National health Service in England and Wales

  • academy schools

  • local government including fire authorities’ employees and maintained schools

  • police forces, including civilian and uniformed officers.

The legislation will not apply to some of the payments made by Scottish, Welsh or Northern Irish bodies.

Under the draft regulations, the following payments will be included within the £95,000 calculation:

  • any payment on account of dismissal by reason of redundancy

  • any payment made to reduce or eliminate an actuarial reduction to a pension on early retirement or in respect to the cost of a pension scheme of such a reduction not being made (often known as ‘pension strain’ payments) 

  • any payment made pursuant to an award of compensation under the ACAS arbitration scheme or a settlement or conciliation agreement

  • any severance payment or ex gratia payment

  • any payment in the form of shares or share options

  • any payment on voluntary exit

  • any payment in lieu of notice due under a contract of employment

  • any payment made to extinguish any liability to pay money under a fixed-term contract 

  • any other payment made, whether under a contract of employment or otherwise, in consequence of termination of employment or loss of office.

In some cases, pension payments involve an additional employer cost relating to an exit and often represent a significant amount of an individual’s exit payment. For this reason, they are within scope of the draft regulations unless an exemption applies. 

The proposed regulations cover all types of termination payments with the main exceptions being payments for death in service and on account of incapacity because of injury and illness. A payment made in respect of annual leave due under a contract of employment but not taken and a payment in lieu of notice due under a contract of employment that does not exceed one quarter of the relevant person’s salary are also excluded.

There will also be an exemption for payments made by a fire and rescue authority to their pension fund account, where the authority exercises its discretion to allow a firefighter who is subject to the above 2.25 times pension commutation lump sum restriction to commute up to a maximum of 25% of their annual pension for a pension lump sum. 

It is also acknowledged that there will be certain circumstances where a relaxation of the rules may be required, which would cover exceptional circumstances, for example cases where the cap would cause genuine hardship.

There has been nothing further from the government at this stage regarding the requirement for public sector employees to re-pay termination payments if they earn more than £80,000 and they are re-employed in that sector within twelve months of leaving. It is expected that a separate consultation on this issue will take place in due course.

As ever with any consultation it is always possible that further changes will be made. However, this does appear to be a decisive step in implementing this long-anticipated reform and employers need to be ready to deal with the consequences.