Termination payments: All payments in lieu of notice are to be taxed from April 2018.

Following consultation which commenced in 2015, the Government has confirmed its intention to tax all payments, including benefits and bonus, that would be due to the employee had they worked their notice. This is regardless of whether the employment contract gives a right to make a payment in lieu of notice or not.


A further consultation which closes on 5 October 2016 has been published along with draft legislation which in short states:


  • The tax exemption for termination payments up to £30,000 (so long as it does not include any pay in lieu of notice) will remain in place, however any payment over £30,000 with be subject to both tax and employers NI. This will increase a payment over £30,000 by up to 13.8%. The employee’s exemption for NI payment will remain.
  • Compensation for injury to feelings on termination will not benefit from tax relief unless there is psychiatric injury or other recognized medical condition.
  • Injury to feelings for pre-termination discrimination will remain tax free up to certain limits.
  • The tax exemption on payment of legal fees and on payments to registered pension schemes will remain


A further draft of the legislation will be published at the time of publication of the draft Finance Bill 2017 legislation.