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Government proposes significant changes to £30,000 tax free termination payments

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The Government is consulting on proposals to change the tax treatment of termination payments. Some of the proposals include;

  • The introduction of a 2 year qualifying period before an employee can benefit from the tax exemption.
  • Changing the fixed tax-free sum of £30,000 to an amount that increases with length of service. An example given in the consultation document suggests the tax exemption being set at £6000 after 2 years service and then increasing by £1000 for each additional year of service. If this example was brought into law, an employee would need 26 years service to qualify for a £30,000 tax-free sum.
  • Only providing the tax exemption where the termination payment is made in connection with redundancy.
  • Removing the distinction between contractual and non-contractual termination payments. If implemented, this proposal could, for example, make payments in lieu of notice (whether provided for in the contract of employment or not), subject to the tax-free amount relevant to the particular employee.

If the government’s proposals come into force we would expect to see a marked reduction in the number and level of tax free lump sums being available to employees when their contracts of employment terminate.

The consultation process is due to close on 16 October 2015. We will keep you updated on any developments.