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Following the report by the Office of Tax Simplification (OTS) into their review of the current system for the taxation of termination payments in July 2014, the government has launched a consultation.
The government's consultation document identifies that the aim of reform is to create 'a regime that is easy for employers to administer and for employees to understand.' More specifically, the government's objectives are that the new system will:
be simple for employers and employees to understand
provide certainty for employees about what the tax and NICs treatment is so there is no additional distress at what is already a difficult time
ensure that the tax and NICs treatment is easy for employers and HMRC to administer
be a fair system, so that those who are better paid and better advised do not receive a more favourable tax and NICs treatment than those who are lower paid
be affordable for the Exchequer
The government has rejected the idea of a blanket exemption and the possibility of doing away with all exemptions. Options for reform which remain under consideration include an exemption linked to statutory redundancy, which was suggested by the OTS as reported in our recent article, 'Budget - how does it affect employment law?'
The government is also considering an exemption which increases proportionately with the number of years' service, removing the distinction between contractual and non-contractual payments, and changing the £30,000 threshold.
It appears inevitable that the system will indeed be overhauled and that the scope for tax and NIC free termination payments will be significantly limited.
Interested parties are invited to respond to the consultation before 16 October 2015. The consultation paper can be found here.