Foreign service relief termination payments

Employer’s NIC charge on termination payments in excess of £3000. There has been much debate about whether the employer’s NIC charge on qualifying termination payments would be a Class employer only or Class 1A (which always is an employer only) charge. Under current rules, this payment can be either totally or partially exempt from UK income tax, depending on the amount of time that the employee has worked overseas. This clause removes foreign service relief on termination payments for UK residents.

This will ensure that all employees who are UK resident in the tax year their employment is terminated will be. In other words a materially lesser amount than will result following the abolition of FSR.

To be chargeable under section 12 the payment does not have to be made by the employer. It could be made by a third party. The government believes income tax relief for foreign service has become outdated and unnecessary. All other non-contractual payments are included within the scope of the £30termination payments exemption. Foreign Service Relief.

Only the amount of the termination payment that is not taxable as earnings can be considered for the foreign service exemption. The remaining amount (£10or US$1568) would be considered under regular termination payment tax rules. What about foreign - service relief ?

Statutory Redundancy Pay is automatically free of tax and NICs, but counts towards the £30limit. Thank you for the opportunity to comment on the proposed additions to the OECD Commentary on Article 15(2) of the Model Treaty, to clarify the treatment of various payments on termination of employment. In the past, employees who received termination payments and who had spent all or a large part of their employment overseas have been eligible to qualify for what is known as ‘ foreign service relief ’. This could potentially give them income tax relief of an amount greater than the standard £30deduction. Currently foreign service relief allows termination payments for certain qualifying individuals to be completely exempt from income tax.

Previously, this provided a further exemption from income tax and NIC depending on the period of time working abroad. Abolish foreign service relief , except in relation to seafarers. The restriction on FSR is perhaps the change which has sparked most debate. As mentioned above, this was origi-nally meant to be part of the current Finance Bill but, owing to stakeholder feedback, it was deferred in favour of further consultation. As part of the Finance Bill, a measure has been introduced to remove foreign service relief for termination payments.

However, a residency test has also been introduced to ensure it only effects those who are UK resident in the tax year their employmen. However, the changes are not as dramatic as what was originally envisaged. The measure also makes changes to certain exemptions in the termination payments legislation.

It removes foreign service relief , with an exemption for seafarers, and clarifies that the exemption for injury does not apply in cases of injured feelings. The payment will be partially exempt, on a pro-rata basis, if there is an element of foreign service but none of the above limits is exceeded. Basically, the employer should split the payment into two components - one representing the overseas service and a second payment representing the domestic employment and then pay the payments separately. The special exemptions will continue although the injury payments exemption will expressly no longer include payments for injured feelings and foreign service relief is being abolished (other than for seafarers).

The balance of the termination payment over and above the PENP is subject to the “normal” rules regarding termination payments (including the £30exemption) and taxed Undoubtedly this will simplify the taxation of termination payments (and specifically PILONs) for HMRC.

Find out if you can claim Tax Relief on your Redundancy payment with Tax Rebate Services. Termination payments: removal of foreign service relief for UK residents.