HMRC Tightening Rules on Termination Payments

Exit packages and settlement agreements are often proposed on the basis of tax-free monies being given to the departing employee. In future, business owners and HR practitioners will need to ensure they understand the impact of recent changes to the law on the taxation of termination payments before making such offers.

What does the law require?

The law introduces a new regime for taxing payments in lieu of notice paid on the termination of employment. In brief, the intention is that any basic pay awarded to an employee in respect of an unworked notice period (whether in part or full) must be taxed as “earnings”. This law will likely mean a change in approach for HR and lawyers who previously might have asked “what does the contract say?” when determining how to treat payments in lieu of notice.

Employers will now need to split a “relevant termination award” into monies to be treated as “earnings” because they reflect a payment in lieu of notice and amounts benefiting from the £30,000 exemption (section 403 ITEPA 2003). Be aware this is not a choice for the employer but the application of a formula set out in the tax legislation.  Employers seeking to offer exit packages are encouraged to seek early advice.

For more details on the new tax rules and how to structure effective exit packages contact Lisa Kemp on 01905 677047 or email

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