Foreign service exemption for termination payments
Produced in partnership with Sam Whitaker of Shearman & Sterling
Foreign service exemption for termination payments

The following Tax practice note produced in partnership with Sam Whitaker of Shearman & Sterling provides comprehensive and up to date legal information covering:

  • Foreign service exemption for termination payments
  • Residence
  • Full exemption
  • Test 1—the foreign service is at least three quarters of total service
  • Test 2—the total service has exceeded 10 years and the last 10 years of the employee’s service has been spent abroad
  • Test 3—the total service has exceeded 20 years and at least half of total service has been spent abroad, including 10 of the last 20 years
  • Applying the three tests for full exemption—example
  • Test 1—the foreign service is at least three quarters of total service
  • Test 2—the total service has exceeded 10 years and the last 10 years of the employee’s service have been spent abroad
  • Test 3—the total service has exceeded 20 years and at least half of total service has been spent abroad, including 10 of the last 20 years
  • More...

The foreign service exemption is, broadly, an exemption from income tax which applies to termination payments where:

  1. the employee worked all or part of the employment period overseas (which the legislation terms 'foreign service'), and

  2. the employee is not UK resident in the tax year in which their employment is terminated

This second limb was introduced in respect of terminations which occur on or after 6 April 2018. Prior to that date, the foreign service exemption did not contain any requirements as to the residence of the employee during the tax year of termination. This April 2018 change has drastically reduced the use of the relief.

The exemption for foreign service only applies to payments that would otherwise be taxable as payments on termination within section 401 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003) (for details on these types of termination payments generally, see Practice Note: Termination payments qualifying for £30,000 exemption).

The exemption can never apply to any amounts taxable under any other taxing provision as earnings, benefits, payments for restrictive covenants or payments from an employer financed retirement benefits scheme since those other taxing provisions take priority (ITEPA 2003, ss 62, 63–220, 225 and 394 (see Practice Note: Termination payments and tax). Any payment on termination that falls within one of those other charging provisions remains taxable.

Where the foreign

Popular documents