The measure will ensure that all employees who are UK resident in the tax year their employment is terminated will be liable to income tax on their termination payment in the same way regardless of whether they have worked abroad. Foreign service relief will continue for current overseas workers.

Individuals will continue to benefit from the existing £30,000 income tax exemption and an unlimited employee National Insurance contributions (NICs) exemption for payments associated with the termination of employment. The rules on income tax and employer NICs for termination payments are aligned so that employer NICs will be payable on payments above £30,000 (which are currently only subject to income tax).

The measure will be effective from 6 April 2018 and will apply to those who have their employment contract terminated on or after 6 April 2018.

The measure is expected to save £40m in the first year which increases to £365m in 2018-19, £400m in 2019-20 and £415m in 2020-21.

In August 2016, HMRC published draft legislation for consultation on changes to the taxation of termination payments as a whole, including the removal of foreign service relief. The consultation highlighted territorial issues with the legislation relating to foreign service. The government therefore announced at Budget 2017 that it would withdraw the original proposal in order to reconsider and bring forward new legislation ready for implementation from April 2018.

Draft legislation: termination payments is available here. 

Report by Amy Austin