Foreign service exemption for termination payments

By Tolley
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The following Personal Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Foreign service exemption for termination payments
  • Introduction
  • Who qualifies for the foreign service exemption?
  • What is ‘foreign service’?
  • Full exemption
  • Partial exemption
  • Comment

Introduction

An exemption from tax can apply to termination payments where the employee worked all or part of the employment period overseas (which the legislation terms ‘foreign service’, see the definition below).

Where an employee has worked overseas and that employee receives a termination payment that falls within ITEPA 2003, ss 401–416 (see the How could a termination payment be taxed? guidance note), the termination payment may be:

  • fully exempt from UK tax, or
  • partially exempt from UK tax

Note that the foreign service exemption (also known as foreign service relief) cannot apply to any amounts taxable as earnings under the post-employment notice pay rules in ITEPA 2003, s 402A–402E. Only the amount of the termination payment that is not taxable as earnings can be considered for the foreign service exemption. See the Termination payments ― overview guidance note.

The foreign service exemption rules changed from April 2018. The changes are discussed below.

Who qualifies for the foreign service exemption?

Prior to 6 April 2018, individuals qualified for full or partial foreign service exemption by virtue of having all or part of their employment with the employer as ‘foreign service’ (as defined below).

However, where the employment is terminated on or after 6 April 2018 (in relation to payments or benefits received on or after 13 September 2017), the foreign service exemption is available only for individuals who:

  • are non-resident in the year in which the employment is terminated (see the Determining residence status (2013/14 onwards) guidance note)
  • are employed as seafarers (using the same definition as applies for the seafarers’ earnings deduction, see the

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