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Termination payments – removal of foreign service relief

14 September 2017

Employers will need to consider the proposed rule changes immediately if they have any internationally mobile staff. They should also consider the wider changes to termination payments when structuring terminations on or after 6 April 2018, particularly given the increased complexity and cost explained below. 

Changes to the income tax and NIC treatment of termination payments from April 2018 were first announced at Budget 2016. The Winter Draft Finance Bill 2017 to 2018 (in conjunction with the recent Summer Finance Bill 2017) sets out the final details.

There are no major surprises and the key headlines remain the same. Payments in lieu of notice (PILONs) will all be taxable. Payments for ‘injury to feelings’ can no longer be exempt while foreign service relief (both the full and partial exemption) will be removed for all UK resident taxpayers except seafarers. Employer’s NIC will be due on the excess of termination payments exceeding £30,000 – although this particular change has been delayed and is expected to apply from April 2020.

Despite the fact that the aim was to simplify the legislation, the new rules remain complex. The calculation of ‘post-employment notice pay’ (determining the value of the PILON that will be taxable) will be involved and the new rules removing Foreign Service Relief (FSR) have some quirks.

The new FSR rules state that employees who are UK residents, according to the Statutory Residency Test, in the tax year in which their employment is terminated will not be able to claim tax relief for any work they undertook overseas.

Effectively, this means all UK resident taxpayers will be treated the same, regardless of where they have carried out the related employment duties. Whilst this may not seem equitable, it does appear straightforward.

However, the draft legislation contains a couple of quirks. Firstly, FSR will continue to apply to payments and benefits which are connected to a change in an individual’s duties or to a change in the earnings from their employment. This is true even if the individual is UK resident. This indicates the Government is targeting just payments made on termination of employment.

Secondly, these changes will apply to those who have their employment terminated on or after 6 April 2018. However, relief will cease even for payments and benefits actually received from 13 September 2017. The date of termination will determine whether the new or old rules will apply.

If you would like advice or guidance on how to manage to impact of the changes announced in the Winter Draft Finance Bill 2017 - 2018 please get in touch.

Read more on the Finance Bill