Termination payments, whether in cash or benefits in kind, are made to individuals for the loss of their job. This document discusses when the payments are fully taxable, partially taxable or fully exempt depending on the nature and the amount of the payment. It also covers the detail on the £30,000 exemption; valuation of non-cash benefits; NIC implications; and reporting and collection of tax.
Termination payments are payments made to an individual relating to the loss of his job. They can take the form of cash or benefits in kind. Termination payments will either be fully taxable, partially taxable or fully exempt depending on the nature and the amount of the payment.
Depending on the circumstances, termination payments can be treated for tax purposes as:
- benefits in kind
- restrictive covenants
- benefits from an employer-financed retirement benefits scheme (EFRBS)
- termination payment (as within ITEPA 2003, s 401)
The taxation of payments made on termination is discussed in more detail in the How could a termination payment be taxed? guidance note. For the purposes of this guidance note, we look at payments that fall into ITEPA 2003, s 401.
It is the employer's responsibility to correctly tax the termination payment and they therefore bear the risk of tax and penalties if the treatment is wrong. This is an area where HMRC sees frequent mistakes in the tax treatment and has targeted such payments in the past.