{"id":4637,"date":"2023-07-03T06:14:14","date_gmt":"2023-07-03T05:14:14","guid":{"rendered":"https:\/\/cloud9accountingteam.co.uk\/?p=4637"},"modified":"2023-07-03T06:14:47","modified_gmt":"2023-07-03T05:14:47","slug":"tax-implications-of-termination-payments","status":"publish","type":"post","link":"https:\/\/cloud9accountingteam.co.uk\/sk\/tax-implications-of-termination-payments\/","title":{"rendered":"Tax Implications of Termination Payments"},"content":{"rendered":"

The number of businesses closing down is steadily increasing. Many of those businesses will have staff, therefore the legal and tax position of any termination payment must be considered.<\/p>\n

Many assume that any amount up to \u00a330,000 is tax free. However, this may not apply to all redundancy payments not least because termination payments will often comprise several elements. For example, any employee with more than two years\u2019 service will be entitled to statutory redundancy payments (not taxable) and where the notice period is not required to be worked in full, payment in lieu of notice (PILON) may be due (taxable). The employee may feel they are entitled to damages, be it due to a breach of their contract or perceived discrimination against them (conditions apply).<\/p>\n

When calculating whether any or part of the payment is tax free, the first consideration needs to be whether any of the payment is contractual (e.g., a contractual bonus) \u2013 if so then that amount will be taxed under PAYE as usual. If any restrictive covenants are in place (i.e., payments made for agreeing to restrict that individual’s future conduct or activities usually for a specific period or area of work), any payment is also taxed under PAYE. If the payment is in lieu of notice that too is subject to PAYE. Any remaining parts of the termination payment potentially fall under the \u00a330,000 exemption.<\/p>\n

Payments in lieu of notice (PILON)<\/strong><\/p>\n

On the termination of employment, an employee is usually entitled to notice. Where this is worked, any income earned for the period will be subject to PAYE as usual. However, where the notice period is not worked, any element of the termination payment relating to a PILON is subject to PAYE as general earnings \u2013 any balance remaining comes within the \u00a330,000 exemption.<\/p>\n

Calculation <\/strong><\/p>\n

To calculate the taxable amount, the amount of ‘post-employment notice pay’ (PENP) needs to be calculated and compared with the ‘relevant termination award’ (RTA). The PENP is the pay the employee would have received had they worked their notice period (excluding any salary sacrifice arrangements). The RTA is the total termination payment excluding statutory redundancy payments.<\/p>\n

The formula used to calculate the PENP is ((BP x D)\/P) \u2013 T where:<\/p>\n