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The government is consulting on how termination payments are taxed. Currently the first £30,000 of any non-contractual termination payment can be paid tax free. This has long been a bug bear of HMRC.

The government is now considering removing the distinction between contractual and non-contractual payments so that a payment in lieu of notice could also be made tax free and changing the amount that can be paid tax free, to reflect the length of service.

Although the consultation document (here) does not set out the proposed thresholds, one suggestion is a £6,000 tax-free sum after two years' employment, increasing by £1,000 for each additional year of employment. Previous discussions also considered linking the tax free sum to the level of a statutory redundancy payment.

If either of these options get the go ahead, then the tax free amount available to the majority of employees will be significantly reduced. It will invariably make the negotiation of termination agreements more difficult and potentially much more expensive.


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