Simplification of termination payments – share your view

Currently, the rules allow some elements of a termination payment to be paid tax free and some elements to be taxed depending upon the “character” of the payment.

HMRC Example

Pat gets made redundant after working for a company for 10 years.

Pat gets a termination payment of £13,750.


This is made up of:


£4,750 statutory redundancy

£5,000 ex-gratia payment for loss of employment

£3,000 PILON

£1,000 of holiday pay


Under the existing rules £4,000 (PILON and holiday pay) of the termination payment will have tax and NICs deducted at the employee’s marginal rate and the employer will need to pay employer NICs on this part of the payment, as this will be classed as earnings.

The £9,750 (statutory and ex-gratia payment) is within the exemption for termination payments. Because the total of this payment is less than £30,000 there is no liability to income tax, neither is there a liability to employer or employee NICs.

The emphasis of the consultation is to make things clearer for individuals and simpler for businesses but also the OTS believe that the current system is unfair because those who are better paid and better advised (i.e. by professionals such as Clive Owen LLP) are often able to structure their affairs so that they benefit from the tax exemptions.


The consultation will therefore seek views upon:


·         removing the distinction between contractual and non-contractual termination payments meaning that all termination payments are subject to tax and national insurance.

·         the design of the new exemption from income tax and NICs for certain payments made upon redundancy.

·         whether the income tax and National Insurance treatment of termination payments should be aligned.

·         which of the existing exemptions which remove the liability to income tax should be retained and whether any new exemptions should be introduced.


Further details can be found at


Responses are required by 11:45pm on 16 October 2015, which is likely to mean that there will be an update in this year’s Autumn Statement.