On 31 July 2014, the OTS published their final report on this matter highlighting their concerns, short-term recommendations and long term recommendations on matters such as termination payments and accommodation benefits, alongside other employee benefits and expenses. In this blog I am looking only at the recommendations in relation to termination payments.
There is currently a £30,000 threshold for non-contractual termination payments within any relevant tax year before tax requires to be paid (the one exception to this is that contractual redundancy payments can also be made tax free up to £30,000). The OTS believes that the position in respect of the £30,000 exemption is confusing and unfair.
The OTS have recommended that a public consultation take place to consider alternative ways in which the rules could be amended. They have also made the following recommendations:-
- the current £30,000 exemption should be replaced with a new income tax relief that is available in the case of statutory redundancy (this would apply irrespective of whether the payment was contractual or not);
- consideration, in terms of the recommendation above, should be given to whether other forms of termination payments should be exempt to tax including unfair dismissal awards, damages payments for wrongful dismissal, discrimination payments that compensate for financial loss and protective awards;
- there should be a review of whether the income tax treatment and national insurance treatment of termination payments should be aligned so that class 1 national insurance contributions are payable on termination payments (once the value of any exemption has been applied).
The OTS have also considered alternatives such as:-
- increasing the current £30,000 exemption in line with the retail prices index to approximately £71,000 rather than replacing it;
- linking the amount of any exemption to the employee's length of service; or
- replacing the current £30,000 exemption with a blanket exemption that would apply to all payments made in relation to a termination.
In the meantime the OTS has suggested the following short term measures:-
- HM Revenue & Customs (HMRC) should revisit its position on the circumstances in which a non-contractual payment in lieu of notice is considered to have been paid with a view to relaxing its requirements;
- HMRC should clarify its guidance on payments made to taxpayers approaching retirement;
- HMRC should clarify its guidance provided on exemptions applying in the case of injury or disability;
- The government should revise the legislation in this area, failing which HMRC should at least provide clearer guidance;
- HMRC should review the way in which termination payment enquiries are dealt with in order to provide more consistent and streamlined support;
- HMRC should review whether or not clearer guidance could be formulated for employers.
It will be interesting to see what comes of this as both employers and employees are also confused by the operation of the tax rules for termination payments. In particular, there is a common misconception that the first £30,000 of any termination payment can be paid tax free.