We don’t yet know what lessons, if any, the Government took from the serial savaging by all sides of its disastrous consultation document on reforming the tax treatment of severance payments https://www.employmentlawworldview.com/uk-government-consults-on-tax-treatment-of-severance-payments-do-you-want-the-bad-news-or-the-bad-news/.

It has not published any response to that feedback, but we can probably take some short-term clarity in this area from yesterday’s Budget. From April 2018:-

  • the £30,000 exemption will be left entirely alone, but Employer (not Employee) NICs will be due on any excess over that number;
  • all payments in lieu of notice and “certain damages” will be taxable as earnings. It is presumed that “certain damages” means wrongful dismissal compensation, as this would allow the Government to hide its embarrassment at its failure to recognise in the original consultation paper that payments in lieu of notice and wrongful dismissal damages are legally the same thing; and
  • foreign service relief will be abolished.

These measures confirm the widespread suspicion that the original consultation document was less about simplification of the severance tax regime and more about increasing the tax-take for the Government. Making payments in lieu of notice taxable as a matter of course will increase the costs for employers of reaching settlement agreements, sometimes materially, even where the overall payment is still less than £30,000.  Nobody much will miss foreign service relief, but the Employer NIC surcharge on payments over £30,000 may also cause complications in squaring what the employer is willing to pay out in total with what the employee requires to receive net.