Non-taxable termination payments

Produced by Tolley in association with Sue El Hachmi of Osborne Clarke LLP

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...

Non-taxable termination payments

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

As discussed in the How could a termination payment be taxed? guidance note, ITEPA 2003, s 401 applies only where a payment is not taxed under another part of the legislation. Using the order of priority set out in that note will assist with assessing whether a payment falls into s 401.

Here, we look at exemptions for those termination payments that are within 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 and NIC. To the extent that the payment exceeds £30,000, both income tax and Class 1A NIC are charged.

The Class 1A NIC charge does not apply to:

  1. termination awards made and paid in full before 6 April 2020

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

  3. termination awards which are received in instalments where the first instalment of the termination award was received before 6 April 2020

If any part of the payment on termination is fully exempt under one of the other statutory provisions set out below, it does not use up the £30,000 exemption. The exemption remains available and can be used if there is any element of the payment which remains taxable under ITEPA 2003, s 401.

Fully exempt payments ― statutory exemptions

These are:

  1. death

  2. injury or disability

  3. payments provided under a tax-exempt pension scheme

  4. payments

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