How could a termination payment be taxed?

Produced by Tolley in association with Sue El Hachmi of Osborne Clarke LLP
Employment Tax
Guidance

How could a termination payment be taxed?

Produced by Tolley in association with Sue El Hachmi of Osborne Clarke LLP
Employment Tax
Guidance
imgtext

Termination payments are defined in the Termination payments ― overview guidance note.

Termination payments can take the form of cash, benefits or both. The payment will either be fully taxable, partially taxable or fully exempt depending on the nature and the amount of the payment.

Depending on the circumstances, termination payments can be categorised as one of the following, each with their own tax and NIC treatment:

  1. earnings ― see the Taxation of cash employment termination payments guidance note

  2. benefits in kind ― see the Taxation of non-cash employment termination payments guidance note

  3. restrictive covenants ― see the Taxation of payments for restrictive covenants guidance note

  4. benefits from an employer-financed retirement benefits scheme (EFRBS) ― see the Employer-financed retirement benefit schemes (EFRBS) ― overview guidance note

  5. termination payments (this includes benefits) within ITEPA 2003, s 401 ― see the Termination payments ― overview guidance note

It is the employer’s responsibility to correctly operate PAYE for termination payments and they, therefore, bear the risk of potential

Continue reading the full document
To gain access to additional expert tax guidance, workflow tools, generative tax AI, and tax research, register for a free trial of Tolley+™
Sue El Hachmi
Sue El Hachmi

Senior Associate at Osborne Clarke


Sue advises on the design and implementation of employee incentive arrangements for private and public companies, including all types of tax-advantaged plans and bespoke arrangements for senior executives and management.Sue also advises on the incentive-related aspects of corporate transactions and has experience of private equity transactions and public company takeovers, flotations and demergers.Sue is a member of the Share Plan Lawyers Group and a member of the UK BioIndustry Association Finance and Tax Advisory Committee.

Powered by Tolley+
  • 25 Nov 2025 10:44

Popular Articles

Class 4 national insurance contributions

Class 4 national insurance contributionsWhat is Class 4 NIC?Class 2 and Class 4 national insurance contributions (NIC) are paid by self-employed individuals and partners in a partnership on their profits arising within the UK. This guidance note considers Class 4 contributions. For Class 2

14 Jul 2020 11:13 | Produced by Tolley Read more Read more

Class 1 v Class 1A

Class 1 v Class 1AClass 1 and Class 1AClass 1 and Class 1A are the categories of NIC that can be charged on expenses reimbursed and benefits provided to employees. These classes are mutually exclusive. A benefit cannot be subject to both Class 1 and Class 1A NIC. Three requirements must be met

Read more Read more

Gilts

Gilts‘Gilts’ are securities that are also known by a number of different names (eg gilt-edged securities, Government securities or treasury stock).The Government sells gilts to fund the deficit between public spending and tax receipts. Normally, the Government pays interest to the holder of the gilt

14 Jul 2020 11:48 | Produced by Tolley Read more Read more