Termination payments definition

View the related Tax Guidance about Termination payments

How could a termination payment be taxed?

How could a termination payment be taxed?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:•earnings ― see the Taxation of cash payments guidance note•benefits in kind ― see the Taxation of non-cash payments guidance note•restrictive covenants ― see the Taxation of payments for restrictive covenants guidance note•benefits from an employer-financed retirement benefits scheme (EFRBS) ― see the Employer Financed Retirement Benefit Schemes (EFRBS) guidance note•termination payments (this includes benefits) within ITEPA 2003, s 401 ― see the Termination payments ― overview guidance noteIt is the employer’s responsibility to correctly operate PAYE for termination payments and they, therefore, bear the risk of potential unpaid tax and NIC as well as interest and penalties if the treatment is wrong. As this is a high-risk area, HMRC will prioritise this in compliance work. HMRC guidance on termination payments starts at EIM12800. See also Simon’s Taxes E4.8 and the Termination payments (B) video.See the Termination of employment guidance note, and other notes in the ‘Dismissal’ sub-topic, for a refresher of

Termination payments ― overview

Termination payments ― overviewTermination payments are payments made to an individual relating to the loss of their job. They can take the form of cash, benefits or both. Termination payments will either be fully taxable, partially taxable or fully exempt depending on the nature and the amount of the payment. Although widely referred to as termination payments, this also applies to payments in relation to a change in the duties of employment or a change in the earnings of that employment. This note therefore covers payments related to retirement, redundancy, dismissal, death, resignation, the nature of the role being changed or a change in pay for the employment. A termination payment may also be referred to as a ‘golden handshake’.Depending on the circumstances, termination payments can be categorised as one of the following, each with their own tax and NIC treatment:•earnings ― see the Taxation of cash payments guidance note•benefits ― see the Taxation of non-cash payments guidance note•restrictive covenants ― see the Taxation of payments for restrictive covenants guidance note•benefits from an employer-financed retirement benefits scheme (EFRBS) ― see the Employer Financed Retirement Benefit Schemes (EFRBS) guidance note•termination payments (this includes benefits) within ITEPA 2003, s 401The PAYE treatment of the various payments made on termination is discussed in more detail in the How could a termination payment be taxed? guidance note. It is the employer’s responsibility to correctly

Statutory redundancy pay

Statutory redundancy payRedundancy payments fall into two categories: statutory payments and non-statutory payments.Statutory redundancy is the amount which must be paid by the employer to the employee under employment law and is a fixed amount for each year of service. Statutory redundancy pay is usually exempt from tax (see below).Non-statutory redundancy payments are any other payment made by the employer to the employee on redundancy. The tax treatment of these payments is discussed in the How could a termination payment be taxed? guidance note.Employment law obligationsAn employee is entitled to a statutory redundancy payment if they are made redundant after being continuously employed by the employer for at least two years. The statutory redundancy payment is calculated by reference to the employee’s age, length of service and gross weekly pay. The amount of a week’s pay is subject to a statutory maximum cap which is reviewed each year. For payments made between 6 April 2021 and 5 April 2022, the maximum amount of a week’s pay is £544. Length of service is capped at 20 years. You can calculate the amount the employee must receive using the redundancy pay calculator on the GOV.UK website. The employer must provide the

UK employment with non-UK workdays

UK employment with non-UK workdaysIn the UK, income that a person receives as the holder of an office or employment is charged to tax as employment income. Employment income is defined in ITEPA 2003, s 7 as either ‘general earnings’ or ‘specific employment income’. Special rules apply to the taxation of general earnings of individuals who are ‘not resident’ or ‘not domiciled’ in the UK. These special rules do not apply to specific employment income. For more detailed information on types of employment income, see the Taxation of cash earnings guidance note.Holding an office or employment is not sufficient to establish that an individual will be subject to tax on worldwide income. The residence status of the individual, the location of the duties, the residence status of the employer and the domicile of the individual may all be relevant in determining the extent of UK taxation. Where the employee is resident and domiciled in the UK, all general earnings are taxable when received. However, where non-residence or non-domicile is involved, the following situations arise:•some earnings are taxed when received•some earnings are taxable only when received in or remitted to the UK•some earnings are not taxable at allITEPA 2003, ss 14–41ZA (Pt 2, Ch 4, Ch 5) set out how to determine the amount of general earnings from an employment that are taxable earnings.Taxation of UK employmentAn employee who is resident in the

Foreign employment

Foreign employmentIntroductionAn employee who works overseas may be entitled to extra reliefs and exemptions. This guidance note covers:•reliefs for travel and subsistence when travelling overseas•exemptions for termination payments made to individuals who have worked overseas for part or all of their employment•special rules that may apply to UK resident, but non-domiciled, employees•special rules for employees in the first three years of residence (known as overseas workday relief)It does not cover the position where an individual leaves the UK to work overseas. This is dealt with in the Residence ― issues on leaving the UK (2013/14 onwards) and Reporting requirements on leaving the UK guidance notes. In addition, the Leaving the UK ― UK source income, Temporary non-residence and UK capital gains tax liability of temporary non-residents guidance notes may be useful.Remember, for tax purposes, the UK territories of the Isle of Man, Jersey and Guernsey are classed as overseas.For further discussion of the meaning of 'foreign earnings', see Simon's Taxes E4.1304.Travel and subsistence reliefsGeneral rules on travel and subsistenceEmployees do not suffer income tax or national insurance on the reimbursement of business travel and / or subsistence costs. See the Expenses and benefits matched by allowable deductions guidance note. If the business travel and / or subsistence expenses are not reimbursed by the employer, a claim for relief can be made by entering the figure in box 17 of the employment supplementary page to the tax return or by completing form P87 and submitting this

Allowable deductions for employee-related expenses

Allowable deductions for employee-related expensesThis guidance note covers the tax treatment of some common types of trading expenditure relating to employees. Some of these are disallowable under general principles, for example the wholly and exclusively test or capital versus revenue expenditure. Some are disallowed under specific statutory rules. For guidance on these, see the Adjustment of profits ― overview guidance note. In this guidance note, unless otherwise stated, references to ITTOIA 2005 are relevant for sole traders / partners and references to CTA 2009 are relevant for companies.Salaries and wagesThe costs of employing staff is typically allowable provided it meets the criteria of being ‘wholly and exclusively’ for the purposes of the trade. This includes wages or salary, plus any benefits in kind. Where remuneration is excessive, it is possible that a deduction may be challenged on the basis of not being for the purposes of the trade. This will normally only be applicable to remuneration of individuals who are connected to the business in some way.When considering the level of remuneration, the whole package of remuneration, comprising salary, wages, benefits in kind, pension contributions and other perquisites must be considered. This does not include dividends received.It is rare for remuneration to be disallowed on the grounds that it is capital. However, it might apply where employees have devoted significant time to the creation or acquisition of capital assets. This is most likely to relate to situations where construction workers perform work on their own premises or legal advisers

Termination payments ― overview

Termination payments ― overviewTermination payments are payments compensating an individual for the loss of their 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.Termination paymentsThe 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 individual’s employment, or•change in the earnings from a person’s employmentITEPA 2003, s 401(1)This guidance note deals with payments received on termination of employment.The payment does not need to be received by the employee / former employee. Any payments or benefits from

What are employer compliance checks?

What are employer compliance checks?The purpose of employer compliance checksThe purpose of an employer compliance check is to satisfy HMRC that all earnings and benefits have been identified and reported correctly by an employer, and that associated payments of income tax and NIC have been made within the statutory time limits. The checks will also consider whether statutory payments and deductions are correct. In the case of large employers (those to which a Customer Compliance Manager has been assigned by HMRC), Know Your Customer visits may be made by HMRC. These are outside the scope of this guidance note.Selection of employers for checksHMRC’s Risk and Intelligence Service (RIS) identifies the cases for compliance checks. This is to remove any bias from the process. Whilst cases are usually selected because a risk has been identified, random selections are also made. Disgruntled former employees or former spouses / partners (of both the business and personal variety) of owners can be a source of HMRC information, although RIS officers are well aware that such information may be incorrect and motivated by non-tax considerations. Employers may wish to consider what could have prompted a check and ensure that they address the issue in their initial meeting with HMRC, since the officer conducting the check is told of any risk that has been identified. Although at one time it was generally thought that an employer could expect ‘a PAYE review’ every six or so years, this is no longer the case and some employers

Information and consultation in collective redundancy

Information and consultation in collective redundancyWhen do the statutory obligations apply?Where an employer is proposing to dismiss as redundant 20 or more employees at one establishment within any period of 90 days, specific statutory requirements for information and consultation exist (see the Collective redundancy ― overview guidance note). The duty requires the employer to consult with appropriate representatives of the affected employees about ways of avoiding the dismissals, reducing the number of dismissals and mitigating the consequences of the dismissals. If an employer fails to comply with these requirements, a claim for a protective award of up to 90 days’ pay per employee may be made to an employment tribunal. This note deals specifically with the information and consultation requirements in a collective redundancy scenario. This UK obligation actually derives from a European Directive, the European Collective Redundancy Directive (98/59/EC). Although the law applies to 20 or more employees at one establishment, the European Directive which it implements refers to establishments in the plural. In the combined case of Union of Shop, Distributive and Allied Workers (USDAW) and B Wilson v WW Realisation 1 Ltd (in liquidation), Ethel Austin Ltd and Secretary of State for Business, Innovation and Skills (C-80/14), the European Court of Justice clarified that the term ‘establishment’ in the European Redundancy Directive (98/59/EC) is to be interpreted as referring to the unit to which the worker was assigned their duties. Therefore, each establishment is to be considered separately. Where fewer than 20 employees are being made

Non-business expenses

Non-business expensesIntroductionIn order for an expense to be tax deductible it must be incurred because of an employee’s employment. Any non-business related expense is, therefore, not relievable except in some very particular circumstances.This guidance note deals with three separate issues. The first is where an expense has both a business and private element. In this case some, or indeed all, of the expense may be allowable. The second case is where an expense must be treated as a non-business expense and is not deductible for tax purposes. The third is expenditure which appears on principles to be non-business yet qualifies as non-taxable, usually due to statutory provision or HMRC concession.Dual purposesIn order to claim a deduction for tax purposes, the expenditure must be incurred ‘wholly, exclusively and necessarily in the performance of the duties of the employment’. This is discussed in the Business expenses ― general rule guidance note. If an expense is not incurred for these reasons then it is disallowed.However, despite the strictness of this test, it is understood that there are instances where obviously business-related expenditure has some private usage. In these instances, the full amount or an element of it may be deductible.HMRC guidance is at EIM31660 onwards.The case law in the area of duality of purpose is often contradictory and appears to lack a clear line of precedence which would provide a simple answer with regard to possible problem areas. In practice, it is often the case that you would