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Guides: Employment Compliance

An Employer's Guide to Other Employment Compliance Issues

Employers' Guide Contents > Termination Payments

4. Termination Payments

Payments and benefits made in connection with the termination of employment are chargeable to tax if they exceed £30,000.  Such payments would not otherwise be taxable as earnings because they arise not as earnings from the employment but rather are considered to be compensation for the breach of employment contract.  They therefore require a special provision to bring them into charge, but that provision exempts the first £30,000.

The £30,000 exemption is not limited to the Statutory Redundancy Pay (SRP).  SRP is an entitlement of the employee – it is open to the employer to pay more should he so wish.  Different employers have different redundancy policies: some pay the bare minimum, others pay more. 

There is a widespread but quite incorrect belief that ex-gratia payments and payments in lieu of notice are always tax-free, whereas each case has to be considered on its merits.  The provision which brings into tax income from employment is very widely drawn. If the Revenue can demonstrate that an alleged ‘ex-gratia’ payment has arisen from the employment (as is usually the case) then it will be taxable under the ordinary rules and will not be exempt by virtue of being a payment in connection with the termination of employment.  Employers should therefore be particularly careful in the matter of ex-gratia payments.  Describing a sum as ‘ex-gratia’ prevents the relieving provision being applied to it.

Payments in lieu of notice (PILON’s) can also be problematic.  In recent years the Revenue have increasingly sought to tax these as earnings arising from the employment, whereas the taxpayer’s view is that they are compensation for the breach of contract and therefore fall within the £30,000 exemption. If the contract of employment gives the employer a right to make a PILON then it will almost certainly be taxable (it arises from the employment).

Exempt payments which fall within the £30,000 limit are also exempt from NI contributions.

The obligation is on the employer to get the tax treatment right.  If there is a failure to operate PAYE, and it is later established, possibly following a PAYE inspection, that the sum paid does not qualify for the exemption then they may be liable to pay not only the employee’s tax but also the employer’s and employee’s Class 1 NI contributions.  They will then be faced with the (unappealing) prospect of obtaining reimbursement from the former employee.

A clearance application may be made to the Revenue (if time permits).

We are able to advise you upon such matters and make clearance applications in cases of doubt.

Disclaimer

While we hope the above has been found to be useful it is intended only as a general guide, may not reflect the very latest developments in law, and cannot be a substitute for professional advice. We cannot accept any responsibility for loss occasioned to any person acting or refraining from acting as a result of material contained in this guide.