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Tax and National Insurance Contribution (NIC) treatment of termination payments

NIC treatment of termination payments

A consultation has been published proposing significant changes to the way in which termination payments are subject to tax and national insurance which picks up from the Office of Tax Simplification’s review of employee benefits and expenses. The consultation emphasises an intention to make things clearer for individuals and simpler for businesses. The proposed changes are, though, also aimed at ensuring that “those who are better paid and better advised (because they are able to afford to pay for advice) do not receive a more favourable tax and NICs treatment than those who are lower paid”.


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In summary, the proposed reforms are as follows:

  • to remove the existing distinction between contractual and non-contractual termination payments.  This means that “all payments made in connection with termination of an employment will be earnings and subject to income tax and employer and employee NICs”; 
  • to introduce a new exemption from income tax and NICs for payments made in connection with redundancy (whether compulsory or voluntary).  The suggestion is that this would be linked to length of service, with an employee qualifying for the exemption after two years, and with the exempt amount increasing proportionately over time; 
  • to introduce new exemptions for payments made as compensation for unfair or wrongful dismissal and for payments made in connection with discrimination;  
  • to retain the existing exemptions for injury or disability and for payments to HM Forces, but to consider the removal of other exemptions; and 
  • to align the income tax and NIC treatment of termination payments.

The document does not set out what might be an appropriate level for the exemption (and specifically requests input on this point).  It does, though, include some worked examples which assume an exemption set at £6,000 after the initial two years of service, rising by £1,000 a year. 

Responses have been requested by 16 October.  Although this was not one of the areas that the Summer Budget stated would be included in next year’s Finance Bill, we may nonetheless hear more from the Government in this year’s Autumn Statement.


For more information please see the full consultation and the Office of Tax Simplification’s review of employee benefits and expenses. 

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