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Settlement Agreements – Consultation on Termination Payments

Posted by Davenport Solicitors Team on August 1, 2015 in Settlement Agreements

Settlement Agreements are used where an employee and employer want to come to an amicable solution and avoid Tribunal proceedings.
On 24 July 2015, the government launched a consultation on simplifying the tax and NICs treatment of termination payments.

Proposals include:

  • removing distinctions between types of payment i.e. a PILON payment would also attract tax-free status
  • replacing the current £30,000 allowance with an exemption for redundancy (voluntary or compulsory) at a rate rising in line with length of service
  • new exemptions for wrongful dismissal, unfair dismissal or discrimination
  • retaining existing illness, disability and armed forces exemptions
  • replacing the existing foreign services exemption with the territorial rules applying to employment income; and
  • anti-avoidance provisions.

The government also seeks views on possible alignment of income tax and NICs rules.

 

The government has recognised that simplification is required and its proposals should lead to greatly reduced burdens on those determining the tax position at a stressful time. It is welcome news that unfair and wrongful dismissal, as well as redundancy, are to benefit from exemption.
This will be good news for some and bad news for others. Those with less than two years’ service will be disadvantaged, and the effect for those with longer service will depend on the rates of exemption that are set. The refocus on the residence of the employee, rather than the place of service, will affect some employees, although the alignment with the rules for taxing earnings makes sense.

 

The removal of certain existing exemptions, such as indemnity insurance benefits, may also be disadvantageous. While the exemptions for illness and disability are to be retained, there is no mention in the consultation document of exemption for death.



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