Jonathan Boyfield: Changes announced to the taxation of termination payments for internationally mobile employees

The Government has recently published draft legislation to remove foreign service relief on the termination payments of employees who have spent part or all of their service with their employer overseas.

Foreign service relief currently allows certain employees who have worked abroad to be either exempt from Income Tax on their termination payment or have the taxable amount reduced.

Under the new measures, employees  who have worked overseas 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 – in other words, they will benefit only 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 existing Statutory Residency Test will be used to determine if an employee is resident in the UK in the tax year in which they receive their termination payment.

The new rules will apply to employment contracts terminated on or after 6 April 2018, and the payment or other benefit is received after 13 September 2017.

If you think you might be affected by the removal of foreign service relief, please get in touch with me on jboyfield@pkf-littlejohn.com or + 44(0) 20 7516 2369.

Jonathan Boyfield is a partner at PKF Littlejohn and head of the firm’s Global Mobility team.