Taxation of Termination Payments

compromise agreement1 300x90 Taxation of Termination Payments


The Government has published a document on the “simplification of the tax and National Insurance treatment of termination payments”. That induces some draft legislation that will change the way that termination payments and settlement agreements are taxed and negotiated.

Currently employers may be able to pay notice payments tax free if there is no contractual right to pay in lieu of notice. Also employers can pay up to £30,000 tax free in some cases and higher payments are also exempt from employers National Insurance. 

The new legislation, due to come into force in April 2018 will change this. What is proposed is that:

  1. All pay in lieu of notice payments will be fully taxed and subjected to National Insurance.
  2. Employers will have to pay employer National Insurance on all termination payments of over £30,000.
  3. Payments for Injury to Feelings in discrimination claims will also be taxed.

Employers will still be able to pay up to £30,000 tax free and without National Insurance.

Employers should take this opportunity to look at their current employment contracts and ensure that they have the best contractual protection. It is likely that if these new laws are brought into force that there will be no reason why all employers should not have contractual pay in lieu of notice clauses in their contracts.  It is also essential that employers take fresh legal advice on any settlement agreements that they are using. Once the law changes in 2018 those will need important changes to ensure that they work properly. It is never a good idea to simply keep using an old settlement agreement as employment law does change so quickly. 

In summary the law may be a little clearer on tax once the new legislation is in force. What is also clear is that this will cost may employers and some employees additional tax when terminating employment or settling employment tribunal claims.

Paul Whitfield is the Principal Solicitor at Fox Whitfield.

Fox Whitfield can advise HR, employers and employees on Settlement Agreements , disciplinary processes, procedures and unfair dismissal claims. We can also arrange meetings in the evenings or at weekends to work around your working hours.

0161 283 1276

Employment Law Solicitors – Head Office based in Manchester with offices located throughout the United Kingdom.