Foreign service exemption for termination payments
Produced in partnership with Tracey Wright of Osborne Clarke, Sue El Hachmi of Carbon Law Partners and Sam Whitaker of Shearman & Sterling LLP
Foreign service exemption for termination payments

The following Tax guidance note Produced in partnership with Tracey Wright of Osborne Clarke, Sue El Hachmi of Carbon Law Partners and Sam Whitaker of Shearman & Sterling LLP provides comprehensive and up to date legal information covering:

  • Foreign service exemption for termination payments
  • Application since 6 April 2018
  • Full exemption
  • Applying the three tests for full exemption—example
  • Partial exemption
  • Partial exemption example—illustrating the reduction in chargeable income
  • What is 'foreign service'?
  • Claiming the relief
  • Double tax treaty

Prior to 6 April 2018, an exemption from income tax could apply to termination payments where the employee worked all or part of the employment period overseas (which the legislation terms 'foreign service').

Since 6 April 2018, the foreign service exemption has not been available to employees who are UK resident in the tax year in which their employment is terminated. This 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 service exemption applies to a payment, that payment may either be fully exempt from tax, or partially exempt.

Application since 6 April 2018

Section 10 of the Finance Act 2018 (FA 2018) abolished