Government Debates Termination Payments

The Government consults on the simplification of the tax and National Insurance treatment of termination payments

Currently the first £30,000 of any genuine termination payment typically payable via the mechanism of a settlement agreement is free of income tax and National Insurance. This has been the position since the 1980’s when the concept of contracting out of your employment rights under the old style compromise agreements was introduced in law. This is the only vehicle (apart from the use of ACAS mediation) where an employee can agree to contract out of their employment rights and the settlement sum is usually payable to take this into account.

The Government wishes to simplify the system and are proposing the following changes set out in its consultation document and dated 24 July 2015.:

1. Removing the distinction between contractual and non-contractual payments which means that any payment in lieu of notice could also be payable tax-free. Currently any written Payment in lieu of notice clause in any terms and conditions of employment means that such payments need to be taxed as income.

2. Changing the £30,000 tax-free sum to an amount that increases in value the longer an employee has been employed.

3. The introduction of a two year qualifying period so that employees with less continuous service are not eligible to be paid a tax-free termination payment.

4. Making some part of any injury to feelings award taxable.

The consultation document aims to make it clearer to employees and to create certainty in terms of the amount of money that they can receive when they lose their job. The Government also aims to ensure that any new tax and National Insurance exemptions are ‘properly targeted and fair’.

The concern with these proposals as set out and illustrated in the consultation document are that employees could end up with a significantly reduced tax-free sum being available when they lose their jobs and are offered a termination payment. This may also impact on the number of settlement agreements that are entered into and may contribute to an increase in litigation as a consequence.

The closing date for the consultation on these proposals is 16 October 2015 and it is therefore vital that arguments are put forward promoting the use of the £30,000 tax-free exemption and arguing that the reality is that the tax-free threshold has actually never been increased in line with inflation over the years, and if anything should be increased.

If you would like more information speak to our Employment Solicitor, Steven Eckett on 020 7998 7777 or email him at

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