Income Tax and National Insurance contributions termination payments: removal of foreign service relief for UK residents
Updated 6 April 2018
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Update
The introduction of employer NationaI Insurance contributions on termination payments above £30,000 will take effect from 6 April 2019.
Foreign service relief
This measure takes effect from the tax year 2018 to 2019. It applies to termination payments received after 13 September 2017 for employments terminated on, or after 6 April 2018. The foreign service exception and reduction is no longer available where the employee, or former employee is UK resident for the tax year in which the employment is terminated.
This measure doesn’t apply to seafarers.
Payments in lieu of notice
From 6 April 2018, the payments in lieu of notice (PILONS) part of the termination payments is chargeable to Income Tax as general earnings and subject to Class 1 National Insurance contributions.
If the termination payments and employment end on, or after 6 April 2018 the legislation applies.
Employers must use the post-employment notice pay formula to work out the amount of the termination payment which is chargeable as general earnings.
Who is likely to be affected
Employers who make termination payments to employees and employees who receive termination payments, where the employee has spent part or all of their service with their employer overseas.
General description of the measure
This measure ensures employees who are UK resident in the tax year their employment is terminated won’t be eligible for foreign service relief on their termination payment. Foreign service relief currently allows qualifying individuals to be either completely exempted from Income Tax on their termination payment or have the taxable amount reduced.
Policy objective
The government believes Income Tax relief for foreign service is outdated and unnecessary. This will help achieve the government’s aims of a fairer tax system. Those who have worked abroad but are resident in the UK in the year their employment is terminated will be taxed in the same way as others who haven’t worked abroad. They 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).
Background to the measure
In August 2016, HM Revenue and Customs (HMRC) published draft legislation for technical 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.
Detailed proposal
Operative date
The measure will have effect from 6 April 2018. It will apply to those who have their employment contract terminated on or after 6 April 2018.
Current law
The termination payments legislation is contained within Chapter 3 of Part 6 of the Income Tax (Earnings and Pensions) Act (ITEPA) 2003, sections 413 to s 414.
Proposed revisions
Legislation will be introduced in Finance Bill 2017 to 2018 to amend sections 413 and 414 of ITEPA 2003. This will ensure only those who are UK resident in the tax year their employment is terminated will be liable to tax on termination.
Sections 413 and 414 ITEPA are being amended to ensure that an employee whose employment is terminated in a tax year when they are UK resident will not be able to claim foreign service relief. The existing Statutory Residency Test will be used to determine which employees are UK resident in the tax year they receive their termination award.
Reductions in the case of foreign service (sometimes referred to as ‘foreign service exemption’) is retained for seafarers.
Summary of impacts
Exchequer impact (£m)
| 2017 to 2018 | 2018 to 2019 | 2019 to 2020 | 2020 to 2021 | 2021 to 2022 |
|---|---|---|---|---|
| + 40 | + 365 | + 400 | + 415 | + 430 |
These figures are set out in Table 2.2 of Spring Budget 2017 as ‘Aligning the tax and employer NICs treatment of termination payments and preventing manipulation of the rules’.
They include the yield from removing foreign service relief for UK residents and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Budget 2016.
Economic impact
This measure is not expected to have any significant macroeconomic impacts.
Impact on individuals, households and families
There is not expected to be any significant impact on individuals or households. Around 1,000 individuals claim foreign service relief each year. This measure means those who are UK resident will no longer be able to claim foreign service relief on termination payments.
The change is not expected to impact on family formation, stability or breakdown.
Equalities impacts
The government has had due regard to equality to comply with section 149 of Equality Act 2010 and relevant Northern Ireland legislation. The proposed measure will impact on people who are employed.
Impact on business including civil society organisations
This measure is expected to have no impact on businesses or civil society organisations as foreign service relief had to be claimed by an individual when submitting their Self Assessment tax return.
Operational impact (£m) (HMRC or other)
There will be negligible HMRC operational impact for this change.
Other impacts
Other impacts have been considered and none has been identified.
Monitoring and evaluation
This measure will be monitored through information collected from tax receipts and communication with affected taxpayer groups.
Further advice
If you have any questions about this change, contact the Income Tax Structure and Earnings by email: incometax.structure@hmrc.gsi.gov.uk.
Declaration
Mel Stride MP, Financial Secretary to the Treasury, has read this tax information and impact note and is satisfied that, given the available evidence, it represents a reasonable view of the likely costs, benefits and impacts of the measure.