Q&As

How are settlement payments treated for tax and NICs purposes?

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Published on LexisPSL on 12/06/2018

The following Tax Q&A provides comprehensive and up to date legal information covering:

  • How are settlement payments treated for tax and NICs purposes?

How are settlement payments treated for tax and NICs purposes?

The taxation of termination payments underwent a substantial reform earlier this year, with changes to the legislative provisions taking effect from 6 April 2018. As a result, from 6 April 2018, the tax (and National Insurance contributions (NICs)) treatment of payments made to employees on the termination of employment was significantly amended and simplified and, in particular, the £30,000 exemption for certain termination payments no longer applies to payments in lieu of notice.

Depending upon the circumstances, termination payments may be taxable in full, in part or, in limited circumstances, may be fully exempt. The first question, both before and after 6 April 2018, is whether a payment made (or other benefit provided) on or in connection with termination of an employment is taxable as earnings within section 62 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003). Only if (or to the extent that) the payment is not taxable as earnings under ITEPA 2003, s

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