Termination payments ― overview

By Tolley in association with Sue El Hachmi of Osborne Clarke LLP

The following Employment Tax guidance note by Tolley in association with Sue El Hachmi of Osborne Clarke LLP provides comprehensive and up to date tax information covering:

Termination payments ― overview
Termination payments
PENP
Exempt payments
£30,000 exemption
Valuation of non-cash benefits
Reporting and collection of tax
Taxation of termination payments ― advising the employee

This document discusses when the payments are fully taxable, partially taxable or fully exempt depending on the nature and the amount of the payment. It also covers the detail on the £30,000 exemption; valuation of non-cash benefits; NIC implications; and reporting and collection of tax.

Termination payments are payments made to an individual relating to the loss of their job. They can take the form of cash or benefits. Termination payments 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:

•earnings
•benefits
•restrictive covenants
•benefits from an employer-financed retirement benefits scheme (EFRBS)
•termination payment within ITEPA 2003, s 401

The taxation of payments made on termination is discussed in more detail in the How could a termination payment be taxed? guidance note. For the purposes of this guidance note, we look at payments that fall into ITEPA 2003, s 401.

It is the employer’s responsibility to correctly tax the termination payment and they, therefore, bear the risk of tax and penalties if the treatment is wrong. As this is a high risk area, HMRC sees has targeted such payments in its compliance work. HMRC guidance on termination payments starts at EIM12800. See also Simon’s Taxes E4.8 (subscription sensitive).

Termination payments

The provisions in ITEPA 2003, s 401 apply to cash payments and benefits received in connection with the termination of an individual’s employment that are not otherwise chargeable to tax. This provision also taxes payments in connection with a change in the duties of employment or a change in the earnings of employment.

The termination payment does not need to be received by the person who has lost their job; any payments or benefits from the employer which are received by their spouse / civil partner, blood relative or dependant can be taxed on the person who lost