Tax treatment of termination payments due to change soon

The Government has announced changes to the tax treatment of termination payments which will result in tax being applied where previously exemptions applied.

The first £30,000 of a termination package that is exempt from income tax. Anything above the £30,000 limit will be subject to income tax. The change relates to the way in which notice is paid and treated. Previously, if there was no contractual entitlement to pay in lieu of notice then this could be included in the tax free element of any termination payment.

With effect from April this year, the £30,000 tax and NI exemption will only be available for redundancy payments (whether statutory, non-contractual or contractual) and compensation for loss of office but NOT for payments in lieu of notice – even when the contract does not make mention of the employers’ right to pay notice in lieu of working.