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Important reforms of tax and NICs treatment of termination payments from 6 April 2018

A number of reforms have been debated by the Government but the following changes will come into force on the 6 April 2018:

  1. Treat all payments in lieu of notice as earnings (and therefore subject to tax and class 1 NICs). Effectively, employers will be required to subject to tax an amount equivalent to the employee's basic pay if and to the extent that notice is not worked. Currently, where there is no contractual right to pay in lieu of notice and it is not the employer’s normal custom and practice to do so, such payments can be free from deductions up to the £30,000 threshold.

  2. Subject all termination payments above the £30,000 threshold to class 1A NICs (employer liability only). Currently, they are only subject to tax, not NICs.

  3. Permit HM Treasury to vary the £30,000 threshold by regulations. There was debate about removing the threshold, so we wait to see what happens next.

  4. Ensure that payments for injury to feelings fall outside the exemption for injury payments, except where the injury amounts to a psychiatric injury or other recognised medical condition.

  5. Abolish foreign service relief (except in relation to seafarers) for UK resident employees.

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