Non-taxable termination payments
Produced in partnership with Sam Whitaker of Shearman & Sterling
Non-taxable 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:

  • Non-taxable termination payments
  • £30,000 exemption
  • Fully exempt payments—statutory exemptions
  • Payments into a registered pension scheme or an EFRBS
  • Payments provided under a tax-exempt pension scheme
  • Foreign service exemption
  • Death
  • Injury or disability
  • Further statutory exemptions
  • Injury to feelings

Some payments made on the termination of an employment or office can be paid tax free. Some of these exemptions are often overlooked in practice.

The termination payment may be exempt from tax because it falls within the £30,000 exemption, because the payment is fully exempted under the relevant legislation or because it is not treated as employment income in the first place.

The exemptions only apply 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)). They do not 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 (ITEPA 2003, ss 62, 63–220, 225 and 394) take priority, see Practice Note: Termination payments and tax. Any payment made on termination that falls within one of these other charging provisions remains taxable.

This Practice Note concerns solely those termination payments that fall within ITEPA 2003, s 401.

£30,000 exemption

There is a specific exemption available against certain termination payments taxable under ITEPA 2003, Pt 6, Ch 3. The exemption means that the first £30,000 of certain termination payments which qualify for the exemption are not treated as employment income and so is exempt from income tax.

To the extent any such payment

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