Termination payments ― overview

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

  • Termination payments ― overview
  • Termination payments
  • Fully exempt payments
  • Payments in lieu of notice
  • Partially taxable payments ― £30,000 exemption
  • Valuation of non-cash benefits
  • NIC implications
  • Taxation of termination payments

Termination payments are payments compensating an individual for the loss of his job. They can take the form of cash or benefits in kind. 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 treated for tax purposes as:

  • earnings
  • benefits in kind
  • restrictive covenants
  • benefits from an employer-financed retirement benefits scheme (EFRBS)
  • termination payments (as within ITEPA 2003, ss 401–416)

The taxation of termination payments is discussed in more detail in the How could a termination payment be taxed? guidance note. You are recommended to read that guidance note before continuing. For the purposes of this guidance note, it is assumed that ITEPA 2003, s 401 applies.

It is the employer’s responsibility to correctly tax the termination payment and therefore the employer bears the risk of tax and penalties if the treatment is wrong. This is an area where HMRC sees frequent mistakes in the tax treatment and it has targeted such payments in the past.

Following a review by the Office of Tax Simplification (OTS), the Government consulted on the simplification of the income tax and national insurance contribution (NIC) treatment of termination payments in 2015 and 2016. Most of the changes apply from April 2018, although the Class 1A NIC changes are delayed until April 2020. These changes are discussed below.

Termination payments

The provisions in ITEPA 2003, s 401 apply to cash payments and benefits in kind received in connection with the:

  • termination of an individual’s employment
  • change in duties of an

More on Employment lump sums: