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The Government is consulting on the simplification of the tax treatment of termination payments.

At present a distinction is drawn in the Income Tax (Earnings and Pensions) Act 2003 between contractual and non-contractual payments. If the company has included a provision in an employment to say that it would pay the employee instead of requiring them to work their notice period, this is generally speaking a contractual payment and therefore taxable under section 62. There are some exceptions to this, and an upper threshold of £30,000 if one of the exceptions applies, or if the payment is not contractual. The proposal is to allow all pay in lieu of notice payments to be tax free.

However, there may well be a two year qualifying period for employees before they can obtain any tax free benefit and then lesser tax free entitlements for all but the longest serving employees!

It would be good to have a simple system for this, and we can only hope that the consultation results in a simple set of legislative rules that can be followed by all.

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