Employment Tax

Taxation of cash payments

Produced by Tolley in association with Sue El Hachmi of Osborne Clarke LLP
  • 15 Dec 2021 11:02

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:

  • Taxation of cash payments
  • Real Time Information (RTI)
  • Tax via PAYE
  • 0T code
  • NIC
  • Standard sum
  • Irregular sum
  • Reporting requirements

Taxation of cash payments

A cash payment received on termination may be taxable depending on the nature of the payment and any available reliefs. To understand whether a cash payment is subject to income tax, see the How could a termination payment be taxed? guidance note.

The termination package may be made up of arrears of salary, bonuses and other sums which the employee is entitled to from the employment or a compensatory sum and other sums only paid because of the termination. Some cash payments may be exempt from tax, see the Non-taxable termination payments guidance note. The references below to termination payments refer to all these payments unless stated otherwise.

Any cash payment of contractual remuneration is to be treated as earnings and taxed through the PAYE system. The payment may also be subject to Class 1 NIC. The collection of income tax and NIC is governed by different rules and also different depending on when the payment is made. For more on the basics of NIC, see the Overview of NIC Classes, rates and thresholds guidance note.

Non-cash benefits may also be included in the termination package. See the Taxation of non-cash payments guidance note.

Real Time Information (RTI)

Most employers have been required to report PAYE information via RTI since 6 April 2013. See the Real time information guidance note for more background.

An employer has always been required to issue a P45 to an employee on leaving. This provides the employee’s tax history for that tax year. Employers are still required

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