Termination payments taxed as earnings
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 taxed as earnings

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 taxed as earnings
  • Statutory definition of earnings
  • Case law on emoluments
  • Contractual payments
  • Termination payments that are not taxed as earnings
  • PAYE implications of termination payments taxed as earnings
  • NICs implications of termination payments taxed as earnings

Depending on the circumstances, a payment made or other benefit provided in connection with the termination of an office or employment may be taxable in full, in part or, in limited circumstances, may be fully exempt. For an overview of the different ways in which a termination payment could be taxed, see Practice Note: Termination payments and tax.

The first question in respect of any termination payment is whether it is taxable on basic principles as earnings from, or an emolument of, an office or employment under section 62 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003) or, under other provisions of ITEPA 2003 which deem certain types of termination payments to be earnings (for example, ITEPA 2003, s 402B which, since 6 April 2018, has deemed non-contractual payments in lieu of notice (PILONs) to be earnings).

This question must be settled before considering any further taxing provisions, such as the benefits code (in ITEPA 2003, Part 3, Chapters 2 to 11), or the specific deeming provisions (in ITEPA 2003, Part 6, Chapter 3) which subject payments and benefits on termination of, or change in the duties or functions of, an office or employment to income tax but provide an exemption for the first £30,000. For more details on the specific deeming provisions, which should be considered if a payment