The government is to look at simplifying deductions from termination payments in response to a consultation process. Last year, the Office of Tax Simplification, announced that the current tax system for termination payments was too complex, too unfair and increased the likelihood of tax avoidance.

Currently non-contractual termination payments (such as for redundancy) are not liable for National Insurance Contributions (NICs) and are tax free below £30,000, but contractual ones are fully subject to income tax and NICs.

The aim of the process that the government is undertaking is to provide more piece of mind to people going through the trauma of the termination process. The reforms will attempt to not only simplify the system but give employees losing their jobs ‘certainty about the amount of money they will receive’.

One of the proposals being considered is a blanket exemption from tax for the first £30,000 of all termination payments, both contractual and non-contractual. But it has been suggested that this option, in the age of austerity, may be financially unsustainable in the long run.

Another suggestion that is, reportedly being considered, is the exempting of statutory redundancy payments from tax. However, this option would also prompt controversy as many workers do not qualify for statutory redundancy and additional legislation would be needed to allow these groups to receive the tax and NICs exemptions.

The government’s preferred option is thought to be to exempt statutory and voluntary redundancy payments from tax and NICs, based on the employee’s service. Therefore employees would need two years’ of working service at a particular company to qualify for the tax exemption.