As it currently stands, qualifying individuals are either completely exempted from Income Tax on their overseas employment termination payment or have the taxable amount reduced through foreign service relief. However, this is set to change from 6 April 2018. In short, if you are UK resident in the tax year the overseas employment is terminated you will no longer be eligible for foreign service relief on your termination payment.
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 those who have not worked abroad. This is all part of the government’s aim to create a fairer tax system, and as many people become increasingly globally mobile, the government believes Income Tax relief for foreign service is now outdated and unnecessary.
Employees will continue to benefit from the existing £30,000 Income Tax exemption and an unlimited employee National Insurance contribution exemption for payments linked to the termination of employment. For employers, National Insurance contributions will now be payable on payments above £30,000 (which are currently only subject to Income Tax).
Please note that the existing Statutory Residence Test will be used to determine whether you are UK resident for the above purposes. Our Statutory Residence Test Guide is available to download here. If you do need any further advice, please do not hesitate to contact us.