Non-taxable termination payments

Produced by Tolley in association with Sue El Hachmi of Osborne Clarke LLP
Non-taxable termination payments

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:

  • Non-taxable termination payments
  • £30,000 exemption
  • Fully exempt payments ― statutory exemptions
  • Payments into a registered pension scheme or an employee-financed retirement benefits scheme
  • Payments provided under a tax-exempt pension scheme
  • Foreign service exemption
  • Death
  • Injury or disability
  • Further statutory exemptions
  • Payments that fall outside ITEPA 2003
  • More...

Some payments made on the termination of an employment or office can be paid tax free. Some of these exemptions are often overlooked in practice. See Simon’s Taxes E4.802DA–E4.802F for an overview of exemptions and exceptions.

A payment may be exempt where:

  1. it falls within the £30,000 exemption

  2. there is a legislative exemption, or

  3. it is not treated as employment income in the first place

The exemptions under ITEPA 2003, s 401 apply only where a payment is not taxed under another part of the legislation. They do not apply to any amounts taxable under any other taxing provision as earnings, benefits, payments for restrictive covenants or payments from an employer financed retirement benefits scheme. See the How could a termination payment be taxed? guidance note. Any payment on termination that falls within one of these other charging provisions remains taxable.

This guidance note concerns those termination payments that would fall to be taxed under ITEPA 2003, s 401.

£30,000 exemption

There is a specific exemption available against termination payments which fall within ITEPA 2003, s 401. The exemption means that the first £30,000 of any termination payment is not treated as employment income and so is exempt from income tax. Currently, no NIC are due on such payments.

From 6 April 2020, Class 1 A NIC will apply to all payments over £30,000. The legislation to amend SSCBA 1992, s 10 to this effect is National Insurance Contributions (Termination Awards and Sporting Testimonials) Act 2019. Guidance is provided in Employer Bulletin Issue 79. The bulletin confirms that the Class 1A NIC will be charged at the usual rate (currently 13.8%). However, unlike other Class 1A NIC charges, it will be paid via RTI.

The Class 1A NIC charge will not apply to:

  1. termination awards received on or after 6th April 2020 in respect of employment which was terminated before 6th April 2020, or

  2. termination awards which are received in instalments where the first instalment of the termination award

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