Non-taxable termination payments

By Tolley in association with Sue El Hachmi of Osborne Clarke LLP

The following Employment Tax guidance note 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 that fall outside ITEPA 2003

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 (subscription sensitive) for an overview of exemptions and exceptions. Note that the case references quoted in this guidance note are all subscription sensitive.

A payment may be exempt where:

  • it falls within the £30,000 exemption
  • there is a legislative exemption, or
  • 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.

ITEPA 2003, ss 221–226E (Part 3, Chapter 12); ITEPA 2003, ss 393–400 (Part 6, Chapter 2)

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 NICs are due on such payments. From 6 April 2020, Class 1A NIC will apply to all payments over £30,000. Legislation to amend SSCBA 1992, s 10 to this effect is expected to be drafted in 2019.

ITEPA 2003, s 403; Simon’s Taxes E4.801 (subscription sensitive)

If any part of the

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