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:
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. Tax is deducted from the payment by the employer and paid through the employer’s payroll.
The payment may also be subject to Class 1 national insurance contributions (NIC). Any employee primary Class 1 NIC will be collected at source in the same way as income tax. Where primary Class 1 NIC is due, the employer also has to pay employer’s secondary Class 1 NIC. The employer may not recover these secondary contributions from the employee.
The collection of income tax and NIC is governed by different rules and is also different depending on when the payment is made.
Non-cash benefits may also be included in the termination package. See the Taxation of non-cash payments guidance note.
Most employers have to report PAYE information in real time since 6 April 2013. This system is known as RTI. See the Real time information guidance note for more background. Payroll reporting is on Full Payment Submissions (FPS).
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 to issue P45s under RTI. However, the employer only needs to give a
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