As part of the July 2015 budget, the Government announced that it would consult on simplifying the tax treatment of termination payments. As you may know, currently the first £30,000 of any non-contractual termination payment is tax and NI free.

The Government is now considering various proposals including:

– Removing the fixed £30,000 tax free sum and replacing it with an amount which increases with length of service (subject to a two year qualifying period and a maximum amount). Although the consultation document does not set out amounts, a worked example suggests payment of a £6,000 tax free sum after two years’ employment, increasing by £1,000 for every further year of service.

– Limiting the tax exemption to termination payments made on redundancy and introducing two new exemptions for compensation in relation to unfair/wrongful dismissal and discrimination. The exemptions would not extend to those resigning in return for payment.

– Removing the distinction between contractual and non-contractual payments.

Although simplification in this area is needed to improve taxpayer certainty and reduce the scope for tax avoidance, the level of tax free payment used as an example in the consultation document is significantly less than the £30,000 currently available. The proposals also disadvantage those with less than two years’ service.

The consultation is open until 16 October 2015 and the Government is then expected to make an announcement on any decisions made as part of the 2015 Autumn Statement.

What do you think of the Government’s proposals?