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Taxation of termination payments – don’t forget the recent changes!

July 10, 2018
Employment Law

A few months ago, we published an article on proposed changes to the rules governing the taxation of termination payments.  These new laws came into effect on 6 April 2018 and it’s fair to say that we are all still coming to terms with the new legal landscape.  Certainly, we have found ourselves advising both employers and employees on some difficult issues arising out of these changes.  With this in mind, we thought it might be worth reminding you of some key principles.

What’s changed?

Before April 2018, depending on the circumstances, it was possible for an employee’s employment to terminate with immediate effect and for the employer to pay the employee an entirely tax-tree payment in relation to the termination of their employment (as long as it didn’t exceed £30,000).  Admittedly, it wasn’t always as straight forward as this and careful thought had to be given to whether the payment in question was a contractual entitlement or not.  However, the prospect of a tax-free payment remained.

Under the new law, if an employee leaves their employment without working out their full notice period, then whilst aspects of the termination payment may still be tax-free, any sum paid in respect of the notice period is almost certain to be taxable.

What does this mean?

This change in the law means that both employers and employees need to carefully consider the deals they strike in relation to termination of employment.  We have seen a few cases in which employers and employees have reached agreement in principle on a ‘lump sum’ tax-free termination payment, only to find out that they cannot safely structure things in this way anymore.  This can cause problems when the employee realises that they may walk away with less money in their back pocket than they had expected.

Take advice early!

Given the problems created by this change in the law, it is particularly important to take legal (and possibly even tax) advice before making any financial offers in relation to the termination of employment.  This should help to ensure that you structure the deal correctly from the outset, avoiding problems further down the track.

Please get in touch if you think we can help.

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