Could the end to tax free employment terminations prove costly?

Could the end to £30,000 tax free employment terminations prove costly?


After the 2015 Summer Budget, the end to £30,000 tax free employment terminations appears to have moved a step a closer.

Previously, all non-contractual termination payments up to £30,000 had been exempt from taxation. Yet after recommendations from the Office of Tax Simplification (OTS) that now looks set to end.

What changes will be made to tax free employment terminations?

The OTS report recommended moving away from the current £30,000 tax exemption which has applied to the vast majority of non-contractual termination payments regardless of the reason for dismissal.

Instead, there would be a move towards a tax relief system which applies only when the reason for dismissal is statutory redundancy. This tax relief would be applicable to all termination payments (contractual or otherwise).

This will mean that termination payments such as settlement agreements, employment tribunal payments and court awards would be fully taxable.

How will this affect the cost of settlement agreements?

The removal of the tax exemption has the potential to increase the complexity of carrying out settlement agreements.

The tax free sum can often play a large role in helping an employer and employee reach an amicable agreement and reduce the overall cost of settlement agreements.

Yet without this potential bargaining tool, it may become much more difficult for an employer to persuade an employee to agree to the termination of their contract. This could mean that cost of settlement agreements will rise to cover the employeeâ??s increased tax liability.

The changes may also lead to both employees and employers seeking to structure dismissals as statutory redundancies in order to offer the most tax beneficial termination payment.

In these circumstances, it is vital for an employer to ensure a fair and reasonable procedure is followed. This could be through entering a meaningful consultation process and giving consideration to ways in which redundancy may be avoided.

You can find out how we can help employers draft settlement agreements here.

Speak to an expert employment solicitor for up to date legal advice

If you are unsure as to how the changes to tax free employment terminations may affect your dismissal process, speak to one of our specialist solicitors for up to date legal advice.

At LawforEmployers, we are here to ensure that any dismissals are both properly executed and handled in the most cost effective manner.

To discuss your circumstances with an expert employment solicitor, call us on 01282 695 400.

Or complete our quick online contact form to book your free consultation.