The Government is considering how they can make the tax and National Insurance treatment of taxation of termination payments simpler and fairer and is seeking views from interested parties as to how this can be achieved.

At present, there is a £30,000.00 termination payment which can be made free of tax and National Insurance providing the same is a non-contractual payment. These are commonly made in settlement agreements where the employee needs to take legal advice on the settlement agreement. The proposal under consultation is to remove the distinction between contractual and non-contractual termination payments so it is easier for everyone to understand. It is also proposing to introduce a change to the fixed £30,000.00 tax free limit which instead increases over time when the employee has been in service in the company. Under the proposal, they will also introduce a two year qualifying period, so no employee can receive the tax free payment unless they have worked with the same employer for two years. The proposal is also to make an injury to feelings award, subject to tax for some or all of the award.

The guidance contained within the consultation document suggests that the tax free sum could be as low as £10,000.00 for an employee with four years’ service. In my view, this change would not encourage settlement of claims at an early stage. Instead the incentive for the employee to accept a payment in settlement of its claims would be diminished, and the likelihood of the employer wanting to make a larger payment whereby it suffers the National Insurance consequences may also be diminished.

Interested parties can have their say by following the consultation here.