Termination payments ― overview

Produced by Tolley

The following Employment Tax guidance note Produced by Tolley provides comprehensive and up to date tax information covering:

  • Termination payments ― overview
  • Termination payments
  • PENP
  • Exempt payments
  • £30,000 exemption
  • NIC treatment of termination payments made on or after 6 April 2020
  • NIC treatment of termination payments made before 6 April 2020
  • Valuation of non-cash benefits
  • Exempt non-cash benefits
  • Reporting and collection of tax and NIC
  • More...

Termination payments ― overview

Termination payments are payments made to an individual relating to the loss of their job. They can take the form of cash, benefits or both. Termination payments will either be fully taxable, partially taxable or fully exempt depending on the nature and the amount of the payment. Although widely referred to as termination payments, this also applies to payments in relation to a change in the duties of employment or a change in the earnings of that employment. This note therefore covers payments related to retirement, redundancy, dismissal, death, resignation, the nature of the role being changed or a change in pay for the employment.

Depending on the circumstances, termination payments can be categorised as one of the following, each with their own tax and NIC treatment:

  1. earnings ― see the Taxation of cash payments guidance note

  2. benefits ― see the Taxation of non-cash payments guidance note

  3. restrictive covenants ― see the Taxation of payments for restrictive covenants guidance note

  4. benefits from an employer-financed retirement benefits scheme (EFRBS) ― see the Employer Financed Retirement Benefit Schemes (EFRBS) guidance note

  5. termination payments (this includes benefits) within ITEPA 2003, s 401

The PAYE treatment of the various payments made on termination is discussed in more detail in the How could a termination payment be taxed? guidance note. It is the employer’s responsibility to correctly operate PAYE for termination payments and they, therefore, bear the risk of potential unpaid tax and NIC as well as interest and penalties if the treatment is wrong. As this is a high-risk area, HMRC will prioritise this in compliance work. HMRC guidance on termination payments starts at EIM12800. See also Simon’s Taxes E4.8 and our video Termination payments (A).

This guidance note looks at those payments which are termination payments within the legislation at ITEPA 2003, s 401 including how to categorise them and the PAYE treatment.

Termination payments

The provisions in ITEPA 2003, s 401 apply to cash payments and benefits received

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