The government is continuing to tinker with the tax system, and there are several changes in the pipeline for the next tax year and beyond. For most employers, the biggest change will be to pay in lieu of notice, which has previously been treated differently depending on whether or not there is a contractual right to be paid in lieu of notice. This distinction is being abolished from 6 April 2018, which means that pay in lieu of notice will always be subject to income tax and national insurance, regardless of what the contract says.
Where a termination payment is made which exceeds the amount which is normally paid in lieu of notice, the notice pay element will be deducted from the total, and only the remainder will be treated as a tax free termination payment. This will almost certainly apply even to termination payments which were previously untaxed, such as those made following a settlement agreement. Unfortunately, this could have the effect of making tax calculations even more complicated.
The recent decision of the Tax Tribunal, that awards for injury to feelings are subject to tax, has now been consolidated into legislation, leaving little prospect that it will ever be reversed.
For international employers, there will be significant changes to the foreign service exemption, and foreign service relief, for termination payments. However, the changes are not as dramatic as what was originally proposed. From 6 April 2018, employees who are not resident in the UK at the time of the termination will continue to benefit from the old rules, but employees who are resident in the UK will not, even if they have worked abroad earlier in the same employment.
The government had proposed changes to national insurance, so that all termination payments which are in excess of the £30,000 threshold will be subject to employer's contributions. It still intends to go ahead with these changes, but they have been postponed until April 2019.
It is also about to start a consultation about important changes to IR35. It proposes to make private sector businesses liable for deducting tax on behalf of anybody who carries out work for them through a personal service company, or through another intermediary. It is anticipated that, regardless of the outcome of the consultation, there are highly likely to be some changes of this nature in the near future.