Termination payments and tax
Produced in partnership with Lesley Fidler and David Heaton of Baker Tilly for Tolley’s Tax Digest and Sam Whitaker of Shearman & Sterling LLP
Termination payments and tax

The following Tax guidance note Produced in partnership with Lesley Fidler and David Heaton of Baker Tilly for Tolley’s Tax Digest and Sam Whitaker of Shearman & Sterling LLP provides comprehensive and up to date legal information covering:

  • Termination payments and tax
  • What does termination include?
  • Potential income tax charging provisions
  • Payments in lieu of notice or PILONs
  • Redundancy payments
  • TUPE
  • Practical implications and settlement agreements
  • International implications of termination payments

The taxation of termination payments underwent a substantial reform in 2018. Consequently, since 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 (PILONs).

According to the Employment Income Manual at EIM13874, HMRC considers the regime, which took effect on 6 April 2018, to apply only where the termination of employment itself occurs on or after 6 April 2018. As a result, any terminations which took place on or before 5 April 2018 will, according to HMRC, be taxed under the pre-6 April 2018 rules, regardless of when the termination payments are made (ie even if the payments are made on or after 6 April 2018).

HMRC has generally updated the termination section of its Employment Income Manual to reflect the changes that were introduced in respect of terminations effected on or after 6 April 2018, in particular by adding pages EIM13874–EIM13898.

As this Practice Note explains, there are many different types of termination payments and, even under the amended legislation that has applied since 6 April 2018, it is still necessary to analyse as a preliminary step whether the payment in question is taxable as ‘earnings’ under section