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HMRC May Abolish £30,000 Tax-Free Rule for Terminations

HMRC May Abolish £30,000 Tax-Free Rule for Terminations

The Office of Tax Simplification is consulting over simplifying the current £30,000 tax-free rules for termination payments.

A copy of the consultation paper, dated 24 July 2015, can be found here comments are requested by 16 October 2015.

A number of proposals are being considered, including the following:

  • Reviewing the existing exemptions “with consideration given to removing some, or all, of the existing exemptions”;

  • Abolishing the contractual/non-contractual distinction, so that both would types of payment could fall within the tax-free rule; and/or

  • Replacing the fixed £30,000 tax-free threshold with a threshold that increases with length of service (the consultation paper gives an example of £6,000 after two years, increasing by £1,000 for each additional year worked)

We welcome simplification of the current regime (which, in our view, focusses too much on the contractual/non-contractual distinction as a legal technicality) and we suspect HMRC will want to simplify it too. However the trade off will, inevitably, be to lower the tax-free threshold from £30,000 so that overall tax revenue doesn’t suffer.