Draft legislation for changes to termination awards

06 December 2016


The government announced at Budget 2016 that it would be reforming the tax and National Insurance (NICs) treatment of termination payments. Currently, certain forms of termination payments are exempt from employee and employer National Insurance contributions and the first £30,000 is income tax free.


Draft legislation has been published to align the rules for tax and employer secondary National Insurance contributions by making an employer liable to pay NICs on termination payments they make to their employees. An employer will be required to pay NICs on any part of a termination payment that exceeds the £30,000 threshold. It is anticipated that this will be collected in ‘real-time’, as part of the employer’s standard weekly or monthly payroll returns and remittances to HMRC.


Geographical extent – The changes are due to come into force from 6 April 2018 and will extend to all four nations of the UK. The draft legislation details the legislative amendments required for both Great Britain and Northern Ireland.


The measure also clarifies the scope of the exemption for termination payments through a number of changes.


All payments in lieu of notice (PILONs) will be both taxable and subject to Class 1 NICs. The legislation requires the employer to identify the amount of basic pay that the employee would have received if they had worked their notice period, even if the employee leaves the employment part way through their notice period. The amount will be treated as earnings and will not be subject to the £30,000 Income Tax exemption. All other termination payments will be included within the scope of the £30,000 termination payments exemption.


The measure also makes changes to certain exemptions in the termination payments legislation. It removes foreign service relief and clarifies that the exemption for injury does not apply in cases of injured feelings.


The legislation will amend the existing section 10 within both the Social Security Contributions and Benefits Act 1992 and the Social Security Contributions and Benefits (Northern Ireland) Act 1992 by providing for the new Class 1A charge on termination payments, keeping the existing provisions for Class 1A contributions payable on benefits in kind provided to employees, and defining which section applies to which.


A tax information and impact note has also been published.