The government will be aligning the employer national insurance contributions (NICs) and tax treatments of termination payments, so employers will have to pay NICs on the elements of termination payments that exceed £30,000.

These changes will be legislated in Finance Bill 2017 and a future NICs Bill and will take effect from April 2018. A technical consultation will be published over the summer.

Currently, certain forms of termination payments are exempt from employee and employer NICs and the first £30,000 is income tax free.

Chancellor George Osborne told MPs: ‘The rules are complex and the exemptions incentivise employers to manipulate the rules, structuring arrangements to include payments that are ordinarily taxable such as notice and bonuses to minimise the tax and National Insurance due.’

The first £30,000 of a termination payment will remain exempt from income tax and the full payment will be outside the scope of employee NICs.

John Harding, PwC employment tax partner, said: ‘The announcement that from April 2018, tax and National Insurance treatment of payments made by employers when they terminate employees is to be more closely aligned, is welcome news.

‘It suggests that some of the more complex proposals floated by HMRC in their recent consultation on this issue have not been taken further at this stage.

‘The headline announcement means that employer's (but not employee's) NI will be charged on all termination payments that exceed £30,000 in the future. This will be an additional cost to employers - potentially making these redundancies much more expensive in the future.

‘This is clearly not the end of the complex treatment of termination payments, which continue to evolve - had the £30,000 exemption kept pace with earnings it would now be in excess of £72,000.’

Treasury estimates suggest the changes to the rules will bring in £45m in 2017/18, increasing to £420m in 2018/19, £470m in 2019/2020 and reaching £485m in 2020/21.

Mark Groom, tax partner at Deloitte, said: ‘The proposal is simple and a positive step toward tax and NICs alignment; however, the change in tax/NI treatment will still result in significant additional costs for employers.  There is no mention of a phasing in period which would have benefitted large organisations with long established redundancy programmes; however, this is compensated by the long lead in time before coming into effect in April 2018.’

There are also indications that HMRC is planning on consulting on wider changes to the tax and NI treatment of termination payments. These could include  abolishing the foreign service exemption, which eliminates or reduces tax on termination payments where an individual has worked overseas; taxing Payments In Lieu of Notice (PILONs) irrespective of whether they are contractual in nature or not; and bringing in new rules to prevent contractual termination payments being ‘disguised’ as damages in order to avoid tax and NICs on them.

Groom said: ‘The government also wishes to “tighten the scope of the exemption to prevent manipulation”. It is not yet clear what this will entail and a detailed technical consultation will follow. This could include new rules that would exclude “payments in lieu of notice” from relief, whether or not those payments are contractual.’