Termination of Foreign Services Exemption

On 10 August 2016 the government published consultation on draft legislation to simplify the tax and National Insurance (NICs) treatment of termination payments. With the aim of a simpler and fairer system, the changes are coming into effect from April 2018. The Foreign Service exemption, which is the current tax exemption for employment outside the UK, will be abolished. The Foreign Service relief currently exempts termination payments from tax and NICs where an employee has worked entirely overseas, or partially exempts the payment where an employee has worked both overseas and in the UK for the employer.

April 2018 will see termination payments taxed as a lump sum at one time. Therefore, termination payments for employees who have worked overseas but who are subsequently made redundant in the UK will be subject to tax in the UK to the extent the payment exceeds the £30,000 exemption limit. The NIC treatment will depend on the coverage in place at the time of termination.

As a result of this change, employers should be aware that the change is likely to have great impact resulting in terminations being more costly.

If you are unsure or you require any assistance or further information on the changes coming, please do not hesitate to contact us.