The Government has now published its response to the initial consultation on simplification of the termination payment tax rules.

While the draft legislation will, in the name of simplicity, remove many of the current tax reliefs, it is pleasing to note that the Government has listened to respondents’ views and will at least maintain the £30,000 exemption.

While the Government is consulting on the draft legislation that will take effect for termination payments made from April 2018 onwards, we do not expect further substantive changes to the rules other than:

:: All payments in lieu of notice (PILONs), whether contractual or not, will be liable to Income Tax and National Insurance Contributions (NIC);

:: Any payment specifically arising from a termination of employment will be exempt from Income Tax up to £30,000 and exempt from employee NIC (even where it exceeds £30,000);

:: The exemption for injury or disability will not be available for any part of a payment that is made for “injury to feelings”;

:: There will be no specific tax relief for all or any part of a termination payment that relates to service periods overseas; and

:: Termination payments exceeding £30,000 will be subject to employer NIC on the excess.

The removal of the blanket NIC exemption for employers could represent a significant increase in costs for downsizing projects from April 6, 2018 onwards. The removal of the other reliefs for employees should simplify the process considerably and reduce the risk of mistakes and unexpected liabilities, particularly for contractual/non-contractual PILONs.

However, with these reliefs removed, employees will pay more tax on the overall termination settlement. In turn, this may result in putting employers under pressure to offer employees higher settlement packages overall.

These changes will clearly raise additional revenue for the Government. There is no suggestion that employers should, or will, react to these changes while the current rules apply. However, the fact that the new rules will only take effect from April 2018 may indicate the Government’s wish to “smooth out” any potential response by employers.

We recommend seeking professional advice well in advance of April 2018 should any of the above be a consideration.

:: Phil Hall is a tax partner at BDO LLP.