Chapter 23 - Termination Payments

Question 1

Introduction

Answer 1

Typically include compensation for loss of office, redundancy payments, damages for dismissal, payments in lieu of notice (PILONs) and certain payments made on retirement.
Either fully taxable, partly or fully exempt.

Question 2

Termination Payments

Answer 2

Anything other than redundancy payment that’s given for services performed in employment is treated as earnings and will be fully taxable
Term payments are usually given for loss of office, so they’re usually not regarded as earnings. They are taxed differently under S401 ITEPA 2003

Question 3

Does Section 401 Apply?

Answer 3

If the payment is contractual, it is treated as earnings and taxed in full.
If it’s not contractual but there was reasonable expectation to get one, it’s taxed in full
If the payment is unexpected and outside of the contract, it is taxed under Section 401.
Section 401 only applies to redundancy and non contractual or ex-gratia (voluntary without obligation) payments
NIC is not charged on S401 payments

Question 4

Fully Exempt Payments

Answer 4

Certain 401 payments are exempt from tax:

• for death, injury or disability
• if paid into a registered pension scheme
• relating to provision of outplacement counselling or retraining

Question 5

Partially Taxable Payments

Answer 5

Redundancy and ex-gratia are only charged to tax to the extent they exceed £30,000. First £30k of a genuine termination payment is tax free.
All that exceeds £30k is taxed as top slice income after dividends at 20, 40 or 45%

Question 6

Redundancy Payments

Answer 6

Two kinds: statutory and non-stat.

Stat must be paid by the employer under law. Fixed amount for each year or service up to £15,240.

Question 7

Payments During Notice Period

Answer 7

If employment is terminated, the employee is normally entitled to wages for the duration of notice. The employer can:

• Pay them and let them work as normal. All the wages are taxable
• Put them on garden leave, all payments are taxable
• Terminate employment within notice and pay what they’re owed - PILONs

Question 8

Tax Treatment of PILONs

Answer 8

Divide into:
1) Post-Employment Notice Pay (PENP); and
2) Amounts which are not PENP
PENP is taxable. Non-PENP is taxed under termination payment rules.

Question 9

Calculating PENP

Answer 9

(BPxD/P) - T
BP = basic pay for the period before the date of notice.
D = days in PENP
P = days in the pay period immediately preceding the period in which the termination payment was made
T = amounts paid on termination that are already taxable as earnings

Question 10

PENP

Answer 10

In most instances, PENP will be equal to basic salary that would’ve been earned had they remained in employment for all of the notice period

Question 11

NIC Implications

Answer 11

Class 1 NIC due on contractual termination payments and PENP

Question 12

Other Payments and Benefits on Termination

Answer 12

Exempt from tax:

• payment of employee legal costs in relation to a dispute on termination
• outplacement counselling
• retraining courses

Question 13

Employer Implications

Answer 13

Employer can claim deductions for:

• term payments wholly exclusively for trade
• stat red payments
• 3 times stat red payment in addition to stat red where it’s made on cessation of trade

Question 14

Employer Reporting

Answer 14

Where the package contains non-cash benefits and is over £30,000, the employer must file a report with HMRC by July 6 after tax year and give a copy to the employee.
Failure = £300 penalty and £60 per day for ongoing failure to report