Changes to tax and severance pay

On 24 July 2015, the Government launched a consultation on simplifying the tax and National Insurance rules relating to severance pay.  It is proposed that the current £30,000 tax free allowance for severance payments be replaced with a new income tax relief for redundancy at a rate that would rise on a sliding scale in line with length of service.  It is also proposed that there would be further specific exemptions for wrongful dismissal and unfair dismissal or discrimination.  Exemptions for illness and disability would be retained.

Currently, whether payments are taxable or not will depend upon their nature and whether or not they are contractual. Contractual payment in lieu of notice payments will be taxable whereas non contractual payments in lieu will not.  The Government intends to remove this distinction so that all payments are treated as earnings and subject to income tax and national insurance.

If the proposals are implemented then those with less than two years’ service are likely to be disadvantaged and the effect for those with longer service will depend upon the rates of exemption that are introduced.  The proposals omit to mention death benefits but this is thought to be an oversight.

Comments are invited by 16 October 2015.  An announcement on any decisions is expected as part of this year’s Autumn Statement.