The first consultation paper on termination payments follows the work untaken by the Office of Tax Simplification on benefits and expenses in 2014 (reported in earlier blogs). The HMRC has put forward various proposals to simplify the current arrangements. It has also sought suggestions on alternative ways in which the current arrangements could be structured.
Key proposals include:
- Removing the current distinction between contractual and non-contractual termination payments, in particular in relation to the different tax and NI treatment of different types of PILON. The suggestion is that contractual PILONs might also benefit from some form of tax relief although the current £30,000 tax exemption which currently applies to non-contractual payments only is likely to be reduced.
- Aligning the tax and NI treatment of termination payments, the likely result being that employee and employer NICs would be payable in respect of termination payments that are subject to income tax.
- Replacing the current £30,000 tax exemption. This is the proposal that is likely to attract most interest. The current proposal is to link the availability of the exemption to length of service and only employees with two years' service or more would qualify. The exemption is also likely to start at a lower rate than the current £30,000, but would then increase at a set rate with each year of service completed up to a maximum amount. Of particular note is that the Government is also considering limiting the exemption to termination payments that have been made in connection with a redundancy, on the basis that the relief would then be targeted at those who are most at need.
Views are being sought on these proposals as well as the appropriate level at which the threshold for the tax and NI exemption should be set over the Summer, with consultation closing on 16 October 2015. Further announcements are then expected in the Autumn Budget.
And, if all that is not enough for you, HMRC is also consulting on possible changes to IR35. Options include placing greater onus on the 'engager' (the end client) to ensure the correct amount of tax is paid and a limitation in the scope of what falls within IR35, with the possible adoption of the deemed employment criteria set out in the intermediaries legislation, reported in earlier blogs.
We will be submitting a response to the consultations – so do let us know your thoughts on the current proprosals. We will then compile the responses and send everyone that replied a summary, so we can all benefit. We look forward to hearing your thoughts.