Taxation of non-cash payments

Termination packages often include both cash and non-cash payments. See the Taxation of cash payments guidance note for information on the taxation of cash payments.

Subject to reliefs and exemptions, non-cash benefits provided on or after termination are taxed under ITEPA 2003, s 401. Any taxable benefits arising before termination are taxed under the benefits code ITEPA 2003, s 63.

It is common for non-cash benefits provided to employees during employment to continue beyond the date of termination. Benefits that straddle the termination are apportioned on a time basis, those falling after termination being taxed under ITEPA 2003, s 401 and those before taxed under ITEPA 2003, s 63.

Non-cash benefits are valued on the cash equivalent of the benefit.

The cash equivalent is the greater of:

• •the amount that would be chargeable under ITEPA 2003, s 62 if the benefit were earnings. The amount is based on ‘money’s worth’ and will be its direct monetary value or the value it is capable of being turned into ― the second-hand value.
• •the cash equivalent as defined through the benefits code

ITEPA 2003, s 415(2)

A comparison of the two values can be relevant when assets are transferred to the terminating employee as these will have ‘money’s worth’ under ITEPA 2003, s 62. The rules in the benefits code are set out in ITEPA 2003, ss 201–215 (the residual liability to charge). These rules cover a number of different situations depending on whether the asset is new or used. In most cases, the cash equivalent under the benefits code is the relevant valuation. However, where assets have increased in value since acquisition by the employer, the ITEPA 2003, s