Termination payments

The tax treatment of termination payments has changed significantly over recent years. The changes have aligned the rules for tax and secondary National Insurance contributions (employer (NICs)) by making an employer liable to pay NICs on termination payments they make to their employees. 

Employees do not pay tax and National Insurance on:

  • Contributions their employer makes to a registered pension scheme as part of their termination payment – tax will be due on any employer contributions that go above the Annual Allowance.
  • Legal costs related to the settlement that their employer pays directly to their solicitor.
  • A termination payment they receive because of an injury, illness or disability that prevents them from being able to continue to do their job.

Employees do not usually pay tax on the first combined £30,000 of:

  • statutory redundancy pay;
  • additional severance or enhanced redundancy payments your employer gives you; and
  • non-cash benefits, for example company property you keep after your employment ends.

Employees are required to pay tax on any amount over a combined total of £30,000.

An employer is required to pay employer Class 1A NICs on any part of a termination payment that exceeds the £30,000 threshold.

Employees are liable to pay tax and National Insurance on payments they would have earned whilst working. This includes lump sum payments in lieu of notice (PILONs), pay on ‘gardening leave’ and part of any severance, enhanced redundancy or non-cash benefits they receive (known as Post-Employment Notice Pay (PENP).

Following a consultation that took place over the summer, the government confirmed that the £30,000 tax free exemption on termination payments would be retained. However, from April 2018 certain payments will no longer fall within the allowance.

It has been confirmed as part of the recent Autumn Statement that from April 2018 termination payments over £30,000, which are subject to Income Tax, will also be subject to employer NICs. Non-contractual termination payments of up to £30,000 will continue to remain exempt from Income Tax and employer NICs. The government will monitor this change and address any further manipulation of those making termination payments.

In addition, from April 2018, it will become irrelevant whether a payment made in lieu of notice is contractual or discretionary. These payments will be subject to deductions for tax and NICs as earnings. In addition, all other post-employment payments which would have been treated as general earnings if the employee had worked their notice period will be subject to tax and Class 1 NICs. These changes will have a direct cost for employers offering significant termination packages.

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Case Studies

The Tax Man

Minimise the stress of an investigation and make use of our extensive experience in securing best outcome for our clients

Business Valuation in Distress

Take advantage of our impartial and rigorous due diligence procedures

FD in The Cupboard

Our innovative ideas are here to improve your business performance and secure appropriate and cost effective funding

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The Tax Man

The Tax Man

A new client was introduced to us via a recommendation with whom we arranged to meet on a regular basis in order to determine a number of changes that we felt were needed to their business structure. The client was at the time operating as a husband and wife partnership. The business was flourishing and had a number of large contracts with big organisations.

At the start of the process they were still heavily immersed in their day to day operations so we can get a full flavour for their ambitions, aspirations and growth plans. We quickly recognised there were sufficient tax savings which can be achieved by changing the structure from a partnership to a corporate entity. We carried out a business valuation and disposed of the goodwill from the old to the new business. Unfortunately, as often is the case with efficient tax planning, HMRC got involved and disputed our valuation.

An HMRC investigation can be a very stressful time for any client, even for those best prepared. However, our client had minimal input in the HMRC communication as we dealt with this professionally behind the scene. As an added benefit, our client could rest on the security that all work was covered by insurance and therefore all costs and time in dealing with this enquiry were covered by the fee protection policy we had put in place.

The initial approach taken by HMRC was very aggressive and they tried to present an argument that there was no goodwill in the business. We challenged HMRC’s view that the goodwill was worthless. After lengthy correspondence and numerous telephone calls, HMRC agreed 100% with our original valuation, which preserved our original tax saving plan for the client. Tax savings on this case where in the region of £75K at the outset, with ongoing savings of £6,000 per annum. We are pleased to add another happy client to our portfolio.

Business Valuation in Distress

Business Valuation in Distress

Selling a business is never an easy process, but when disputes arise, the need for a reliable third party due diligence process is even greater.

Tearle & Carver have extensive understanding of the requirements for remaining objective when managing a potentially difficult company buyout. In one such case, we were approached by the courts to act as independent accountant for an acrimonious business sale in which one partner was exiting the business and selling shares to the other. Given the circumstances, both sides had totally polar views of what their business was worth.

After arranging an initial meeting with the company, we were thorough in ensuring we completed due diligence, validating the figures in the accounting records, carrying out adjustments where appropriate, and drafting a set of reliable management figures within the framework required by the court.

A draft version of the report detailing our findings and conclusions was submitted to both parties, giving them the opportunity to voice any queries or concerns and ensure all relevant factors had been taken into account.

Through this process, we were able to submit a final report to the courts that was both binding and acceptable to both parties, effectively resolving what could otherwise have been a time consuming and costly process for all sides.

FD in The Cupboard

FD in The Cupboard

For smaller companies, it is often not possible or cost effective to pay for a full-time Financial Director.
Many of our clients therefore make use of Tearle & Carver’s extensive expertise to provide the services of an FD as and when required.

In this case, we were approached by the management team of an organisation looking to acquire the existing business via an MBO (Management buy out). Their business plan had proved ineffective for securing funding, and what they needed was financial expertise from someone with a developed understanding of the company’s internal workings.

Tearle & Carver helped deliver the solution our clients were looking through utilising our bank contacts in order to make the MBO viable, while also building a robust business plan and preparing our client for the rigorous vetting process. To help with cash flow issues, we introduced factoring which led to improved cash flow management.

We advised on the appropriate business valuation and structure, and continued to prepare monthly accounts to track profgress once the management were fully in command of all the information they needed to move their business forward.

In order to best assist these clients through the crucial first year of ownership, we attended board meetings on a regular basis, a service that we continue to provide to date.

With our continually developing understanding of their business, this client is able to remain confident that Tearle & Carver can provide any financial support they may need, now and in the future.