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Published on 14 October 2015

Simplification of the tax and National Insurance treatment of termination payments

LITRG has responded to a joint HMT/HMRC consultation document on simplification of the income tax and National Insurance contributions (NIC) treatment of termination payments. The consultation aims to continue the work of HMRC to implement the proposals originally put forward in 2014 by the Office of Tax Simplification (OTS).

LITRG observes that the income tax and NIC treatment of termination payments should take account of employment law. In that regard, it is disappointing that the consultation does not recognise the preference of the OTS for income tax relief to be available only when the employee qualifies for statutory redundancy (and equivalent situations for those unable to qualify for redundancy). This would make it easier to understand when relief is available and would result in a common approach between employment and tax law. Such an approach would need to take into account the various individuals currently unable to qualify for statutory redundancy, so that they are not placed at a disadvantage.

In addition, alignment of the income tax and NIC treatment of termination payments will eliminate some burdens for employers (although it is likely to increase the Class 1 NIC burden for both employers and employees), but unless and until there is complete alignment or integration of income tax and NIC, discrepancies, and therefore complexity, will remain.

LITRG points out that any changes to the termination payments regime should not result in a less favourable outcome for low income individuals, particularly as the proposals are being brought forward under the banner of fairness and simplicity. LITRG also note the importance of ensuring that tax credits and Universal Credit claimants are not disadvantaged by any changes.

The consultation is available on GOV.UK.

The LITRG response can be found here.

Joanne Walker

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