Income Tax - Termination Payments

Popular Misconceptions

In order to determine whether any tax is due on a termination payment it is necessary to separate the various elements of that payment. Outstanding wages or holiday pay will be taxable as earnings, for example, being payment in return for services.

Whether other elements (such as payments in lieu of notice) escape taxation may be determined by the provisions of the Employments Contract. Alternatively, the approach an employer normally takes in dealing with termination payments may become the "custom and practice", thereby creating an expected (rather than contracted) payment. Either way, tax may become due unexpectedly because of actions or provision which appear unrelated to taxation.

Employers should beware as the wrong tax treatment at the time of termination may result in tax and national insurance being demanded by the Revenue, together with interest and penalties. Additionally, the employer may be unable to recover the tax and national insurance from the employee who, by then, may well be out reach.

Time Limits

Taxpayers with underpayments have until 30 September 2005 to submit their Self Assessment Tax Returns to have the tax collected through their PAYE coding notices, rather than by demand.
It is widely believed by Employers and Employees alike that termination payments (cash and benefits) are only taxable to the extent that they exceed £30,000.
Regardless of the reason for the cessation of an employment, the employee will often receive some form of final payment. The payment may simply be any outstanding wages or it may take the form of a more complex termination package comprising a number of different elements.

If you would like to discuss any of the above issues in more detail, please contact Les Styles or John Ellis at Styles & Co on 01925 761600.