The Government is consulting on “simplifying” the tax treatment of termination payments.
A consultation by the Office for Tax Simplification in October suggested that all termination payments should be taxable (with some limited exemptions). Currently non-contractual termination payments under £30,000 in certain situations, such as where a termination payment is paid as compensation for damages for breach of contract or where it is paid as a redundancy payment, are paid tax free. 
In addition, termination payments are usually free from National Insurance contributions given that they are not classed as “earnings”. If government plans go ahead there will be pressure on employers to ‘gross-up’ such payments.
In addition to tax on termination payments employers may also be subject to tax on any legal fees agreed as part of Settlement Agreements. Currently, when employees are asked to sign Settlement Agreements, they do not pay tax on any contribution to legal fees paid 
by their employer. However, the proposals suggest removing this concession which, again, is likely to result in pressure on employers to gross up the contribution.
For help on this or any other HR matter please contact the HR Team at ProAktive on 01302 341344.