HMRC issues guidance on taxation of termination payments

Employment / 12 April 2018

HMRC has updated its Employment Income Manual (“EIM”) with new sections dealing with the recent changes to taxation of termination payments (which we previously updated you on here).

ISSUE:

The recent changes to the taxation of termination payments are complicated.  Since the changes were announced, we have been awaiting further guidance on how calculations of “post-employment notice pay” operate in practice.

KEY DATES:

Changes to the taxation of termination payments took effect from 6 April 2018.  The changes dealing with post-employment notice pay apply to payments or benefits received on or after 6 April 2018 where the employment also ends on or after 6 April 2018.

IMPACT:

Whilst the guidance does not clarify all of the complexities of the new rules, it does go some way to providing greater clarification and will be welcome to employers and their payroll teams.

The key new sections of the EIM are EIM13874 to EIM13898. EIM14000 contains a useful case study example which deals with the treatment of a statutory redundancy payment, compensation for loss of employment, a termination bonus and a contractual payment in lieu of notice clause.

ACTION:

Employers and their payroll teams should familiarise themselves with the new guidance. This will assist them when applying the relevant formula to the total amount of relevant termination payments going forward.  In the meantime, employers are advised to seek expert legal or tax advice should they have any questions when it comes to these changes.