The following Employment Tax guidance note Produced by Tolley in association with Sue El Hachmi of Osborne Clarke LLP provides comprehensive and up to date tax information covering:
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 definition below). For UK residents (with the exception of seafarers), this relief no longer applies to terminations on or after 6 April 2018, and payments made on or after 13 September 2017. There is no change in the relief in relation to change of duties or earnings.
Where an employee has worked overseas and receives a payment on termination which fails to be taxed under ITEPA 2003, s 401 (see the How could a termination payment be taxed? guidance note), that payment may either be fully exempt from tax or partially exempt.
The full exemption rules are complex. It is best, once it has been established that the individual is not resident in the UK, to work through them test by test. If any of the three tests discussed below are met, then the termination payment is completely tax-free.
See Example 1.
If an employee has been in service for 10 years, and has spent eight of those 10 years abroad, the foreign service comprises more than three-quarters of total service, so the termination payment is fully exempt so long as the employee is not resident in the UK, where the termination is, on or after 6 April 2018.
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