In August, the government launched its consultation on simplifying the tax and national insurance treatment of termination payments, which had been inexplicably delayed following the 23 June referendum.
Changes are proposed for the treatment of termination payments from April 2018. From then, all payments in lieu of notice (PILONs) will be subject to income tax and national insurance (NICs) as earnings, representing a major change from the current position where non-contractual PILONs may be covered by a £30,000 exemption. Other changes from April 2018 include all other post-employment payments which would have been treated as general earnings if the employee had worked their notice period being subject to both tax and NICs. Payments relating directly to the termination of the employment will continue to have a £30,000 income tax and NICs exemption and the employee NICs exemption remains unlimited. However employers will suffer the additional cost of employer NICs where amounts are in excess of the £30,000 exemption - another major change.
No one could deny that the rules regarding taxation and national insurance liabilities on termination payments needed addressing. This is a complex area and in some ways subjective, leaving both employers and employees with a degree of uncertainty as to whether exemptions apply or not and whether they may be hit with tax and NICs charges some months or even years later. The proposals go some way towards a clearer system, but whether the new rules will in fact be any simpler to administer seems doubtful given the new disparity between the employee NICs treatment and the employer NICs treatment.
What is clearer is that, by including all PILONs in the income tax and NICs charge and removing the employers’ NICs exemption on termination payments above £30,000, the tax and NICs charges for both employer and employee will be significantly more under the new rules.
Simplification is good, right? But not when simplification simply means higher taxes as seems to be the case here.
If you would like any more information on this issue please get in touch with Jackie Hall or your usual RSM contact.