The changes to tax treatment of termination payments

From 6th April 2018, new rules on how termination payments are to be treated with regards to tax came into force.  These new rules have tightened the tax treatment of payments made, whether these are made within a settlement agreement or not.  Some of the most common have been highlighted below but obtaining advice in respect of termination payments should be taken to ensure the tax treatment is applied correctly.

Where such payments are made, it is now important to assess the basis on which the payments are made and the factual background in order to assess whether tax is payable or not.  The statute applicable in relation to this matter is the Income Tax (Earnings and Pensions) Act 2003 (ITEPA).

HMRC recommends that the following questions be addressed, in the following order:

  1. Does the payment fall within the category of general earnings (or is it a benefit of the employment) under Parts 2 to 5 of ITEPA 2003?
  2. If not, is the payment for a restrictive covenant taxable under 225& 226 of ITEPA 2003?
  3. If not, and no other income tax charge applies (for example, compensation for loss of a share option), is the payment taxable under s. 401- 416  of ITEPA 2003?

This follows the order of priority in which the statutory provisions are applied.

Sections 401 – 416 of ITEPA 2003 act as charging provisions for termination payments where no other charging provision applies. As a result, they will only apply if the payments are not otherwise taxable under s. 62 of ITEPA 2003 or any other provision such as those above.  It covers payments and other benefits received in connection with the termination of employment or a variation in the duties or earnings from employment.

  1. 401 is widely drafted and is designed to catch all payments and benefits that are not earnings. Therefore, rarely will ex gratiapayments (in excess of £30,000) escape liability to taxation altogether. The first £30,000 of payments that fall within section 401 and is not treated as “post-employment notice pay” (PENP) is exempt from tax and any excess will be subject to income tax in the normal way.


NICs are generally payable in respect of all termination payments to which the employee is entitled under the contract of employment. HMRC may also argue that NICs are payable where there is an automatic practice of making termination payments, even where there is no express contractual right.

Payments within s. 401 – 416 of ITEPA 2003 are not “earnings” for NICs purposes and are therefore not generally liable to NICs, but may be brought into charge by express provisions.

The different types of payments

HMRC continues to scrutinise carefully payments made on the termination of employment where s. 401 – 416 of ITEPA 2003 are being relied on. Careful analysis of the nature of a termination payment is crucial therefore, as this will determine its tax treatment.

Contractual severance payments (other than payments in lieu)

Most contractual payments are liable to income tax under s.62 of ITEPA 2003 and to NICs. This is the case even if the payment is intended to compensate for loss of future earnings.

HMRC also treats payments made on termination as subject to tax under section 62 of ITEPA 2003 if there is an established custom of making these payments.

Benefits in kind

Severance packages often include benefits in kind, such as a company car. Other than specific exclusions such as outplacement costs, the benefits are valued in the same way as benefits provided during. Non-cash benefits will be valued at an amount equal to the cash equivalent of the benefit.

Share options and share awards

Employees may be entitled to exercise share options and/or receive share awards either before or at some point after termination.  The terms of the relevant employee share scheme will govern any right of exercise or entitlement to receive shares. Therefore, the reason for the termination will need to be clearly identified for the purposes of dealing correctly with the employee’s share scheme entitlements.  However, there are many factors which need careful consideration as in relation to shares so individual advice on this is crucial.

Payments in lieu of notice from April 2018

From 6 April 2018, all payments in lieu of notice (PILON) paid on termination of employment will be classed as earnings. Payments will therefore be subject to tax and class 1 NICs.  The tax treatment no longer depends on whether there is a contractual PILON in the contract of employment or not and settlement agreements will clearly need to show which portion of the payment is a PILON.

What is a relevant termination award?

A relevant termination award (RTA) is a termination award excluding specified payments.

A termination award is defined as a payment or other benefit received directly or indirectly in consideration of in consequence of or otherwise in connection with the termination of a person’s employment.  Accordingly, payments or other benefits chargeable to tax apart (such as restrictive covenants and contractual PILONs for example) are not termination awards.

The excluded payments are statutory redundancy pay and approved contractual pay (to the extent that it does not exceed the statutory redundancy pay).   So, these automatically benefit from the £30,000 exemption.

This means that non-statutory redundancy pay is a termination award and, in contrast with statutory redundancy pay is not excluded.

Therefore, non-statutory redundancy is a “relevant termination award” and will no longer automatically fall within the £30,000 exemption.

What must be taxed as earnings?

The slice of the relevant termination award (RTA) that must be treated as earnings under s. 402B is:

  • The entire RTA if “post-employment notice pay” (PENP) is equal to or more than the RTA.
  • PENP, if it is less than the RTA but is not nil.

If PENP is a negative amount, it is treated as nil.

Pay in Lieu of Notice (PILON)

There are a number of different types of PILON’s used and, for the most part, HMRC will consider them all as taxable.  Indeed, there is numerous case law just on this topic.  Certainly contractual and implied PILON’s are usually taxable but PILON’s paid as damages for loss of notice may fall within s. 401 of ITEPA 2003 and can therefore be paid tax free (up to the £30,000 limit).   However, HMRC will look carefully at the reason for the PILON payment to ensure it falls within the definition of damages rather than another sort of PILON so a careful analysis of this is important.  Advice should be taken in each circumstance.


Statutory and enhanced redundancy payments fall within s. 401-416 of ITEPA 2003, provided they are paid genuinely on account of redundancy. No NICs are payable.

Payments which are, in fact, a terminal bonus paid in recognition of an employee’s services during the notice period or during the employment generally will be taxable s. 62 and subject to NICs.

The employer should take care if the employee is retiring, or where some of the redundancy payment will be conditional on staying until a specified date, because HMRC could seek to tax such payments as employment income.

New PENP rules from 6 April 2018

As noted above, statutory redundancy pay and approved contractual pay (to the extent that it does not exceed statutory redundancy pay) automatically benefit from the £30,000 exemption.

Non-statutory redundancy will no longer automatically fall within the £30,000 exemption.

For any queries in relation to the above, or termination payments generally, please contact Ilinca Mardarescu.

You’re paying more tax than Facebook

Social media giants Facebook are reported, by the Sunday Times, to have paid just £4,327 in corporation tax to the UK government in 2014.

The average UK worker, who receives a salary of £26,500, will pay £5,392.90 in income tax and national insurance. Yes you read that correctly; the multi-national corporation with global profits of over £1.4 billion pay less tax to the UK government than the average UK working citizen. Continue reading “You’re paying more tax than Facebook”

Gifting to Charities? Land, Building and Shares explained.

New HMRC guidance has confirmed that charities and community amateur sports clubs can accept gifts of buildings or land under wills, and either keep them or sell them to release funds. Continue reading “Gifting to Charities? Land, Building and Shares explained.”

G20 Nations to Take on Global Tax Avoidance

The worlds G20 nations are expected to make an agreement today to fight against tax avoidance by multinationals. While much of the gathering will be taken up by topics including Syria and the US financial stimulus programme it is expected that the G20 nations will sign an agreement putting further focus on tax avoidance.

The focus of these discussions will be the use of legal methods to avoid tax being used by the world’s biggest companies including Starbucks and Amazon. In recent months it has been revealed that many international companies have been using a number of legal methods to avoid tax, it is these methods which the G20 nations aim to put pressure on.

Ashton Hudson, Online Marketing Executive

Capture your bounty like Elliot Ness

Al Capone was once a well known crime figure and a leader among the American underworld. Back in the 1930’s he had a personal fortune of over $100 million dollars. After all his crimes he committed to reach the top he was eventually brought to justice by none other than Elliot Ness.  The only way to capture Al Capone was through his books and finally justice prevailed as he was caught evading tax.

When paying your taxes there is a very fine line between that of avoidance and evasion. Put rightly by our former Chancellor of Exchequer Denis Healey, who once said:

“The difference between tax avoidance and tax evasion is the thickness of a prison wall”.

Avoiding tax involves using legal methods, these methods can be as simple as planning a clients finances so that they are eligible to use the deductions and exemptions available to them to their full advantage.  Also other forms can include investing money every year into cash ISA accounts and bonds to reduce the amount of tax to pay.

However, avoiding tax must be distinguished from evading tax, this in turn is a criminal sanction. Tax evasion involves paying less tax than the law requires you to pay. This can be disguised in different ways such as declaring less income and profit. This is commonly known as being part of the informal economy and now new measures have been placed on this unreported income.

Complicated as it may sound, tax law is a very niche area of the law but also very necessary as there are only two certainties in life; death and taxes. If we can take any advice from our former Chancellor of Exchequer it is that we need to stay on the other side of the prison wall.

Vinesh Patel, Paralegal 


Aston Bond’s Solicitors in Slough specialise in tax law and advice individuals and businesses across England and Wales on their taxes. If you would like to speak to one of our specialist tax law solicitors please call 01753 486 777 or email Alternatively, you can visit our offices at 135 High Street, Slough, Berkshire, SL1 1DN.

Budget 2013: What to expect

On the day Osborne was delivering the Budget 2013 before the House of Commons he tweeted this “Today I’ll present a Budget that tackles the economy’s problems head on helping those who want to work hard & get on delivered”. While I leave  discussions whether the budget in any way helps  to tackle economic problems the UK has been facing for the last few years to economics I aim to summarise changes in tax world (not a  full list) which might affect our clients on a daily basis;

  • Income Tax Personal Allowance will be increased to £9,440 from April 2013.
  • Additional income tax rate of 50% which applies to taxpayers earning over £150,000 per annum will be reduced to 45% for the tax year of 2013/2014.
  • Unlimited income tax relief will be capped at the greater of £50,000 or 25% of an individuals’ income. Charitable reliefs or share loss relief applying to EIS or SEIS will be exempt.
  • UK income tax on any income arising to non-resident athletes who will compete in the London Anniversary Games in 2013 or the Glasgow Commonwealth Games in 2014 will be exempt.
  • £2,000 Employer National Insurance Allowance will be introduced.
  • Statutory residence test for taxpayers will be introduced from 6 April 2013. Please see my previous blog on this matter.
  • Entrepreneur’s Relief will be extended to include gains made on shares acquired via the exercise of EMI options.
  • IHT nil rate band (£325,000) is frozen until 2017-2018.
  • Small profit rate of corporation tax will remain at 20% from April 2013. The main rate will be reduced to 21% from April 2014.
  • Annual Investment Allowance will be increased £250,000 for two years for   investments in plant and machinery made on or after 1 January 2013.
  • Annual Exempt Amount for CGT will be £11,000 in April 2014.

Tulin Kiranoglu, Solicitor, Tax Advisor


The UK and Swiss Cooperation Agreement

This Agreement has been in force since 1 January 2013 and covers UK residents (including non-UK residents who are UK nationals and use UK correspondence addresses) whom hold an account with a Swiss bank.

Account holders have two options under the Agreement;

  1. Agree to the Swiss bank disclosing their bank details to HM Revenue and Customs; or
  2. Pay a one-off tax charge for any monies that have been held by the said banks at a rate between 21% and 41% of the value of the fund. This tax will cover all the tax liabilities on any Swiss funds.

There are other options available for non-domiciled UK residents.

The deadline for this is 31st May 2013.

If you hold an account with any Swiss bank you can contact us to discuss your individual circumstances and needs further.

Tulin Kiranoglu, Solicitor, Tax Advisor


Intermediaries Legislation (IR35)

HM Revenue and Customs (HMRC) published new IR35 guidance “Intermediaries Legislation (IR35) Business Entity Test Example Scenarios” on 9 May 2012. The guidance only applies to tax payers who provide their personal services to clients through a limited company or a partnership, i.e. by means of intermediaries.

In these circumstances, they are required to comply with IR35 and self-asses themselves which risk band they are in, such as a low, medium or high risk of IR35 review by way of answering 12 questions set out in the guidance. Each question is weighted and scored.

While intermediaries’ legislation still examines each contract individually, the new guidance changes HMRC’s approach from assessing the risk of each contract to assessing the risk of a “business entity”. However, the business entity test does not replace the legal test of whether or not a specific contract is outside of IR35 legislation.

Nevertheless, if tax payers prove that they are outside the scope of IR35 legislation or they are in the low risk band, they are entitled to request HMRC to close their IR35 review. In addition, HMRC undertakes not to check the same taxpayer for the next three years provided that the information given to HMRC was accurate and the tax payer does not change his working arrangements.

01753 486 777

Seed Enterprise Investment Scheme

The Government has introduced a new venture capital scheme in the Finance Act 2012, which applies to investments made between April 6 2012 and April 6 2017. The scheme works similarly to the Enterprise Investment Scheme. However, this new relief solely concentrates on early-stage small trading companies, which are more likely to be affected by the endless recession we have been in.

The individual investor is a qualifying investor in relation to the relevant shares if:

  •  the investor is not an employee;
  • s/he does not have substantial interest (i.e. does not hold 30% of the ordinary share capital or voting rights) in the issuing company;
  • s/he does have linked loans; and
  •  tax avoidance is not the primary and main aim for the subscription.

The relevant shares subscribed must be non-redeemable ordinary shares, and should not carry preferential rights to dividends and company’s assets on a winding-up.

The relevant shares (other than any of them which are bonus shares) must be issued in order to raise money for the purposes of a qualifying business activity carried on, or to be carried on, by the issuing company or a qualifying 90% subsidiary of that company.

The issuing company must be relatively small. In the case of relevant shares issued by a single company, the value of the company’s assets must not exceed £200,000 and the full-time equivalent employee number for it must be less than 25 immediately before the relevant shares are issued. In the case of relevant shares issued by a parent company, the value of the group assets must not exceed £200,000 and the full-time equivalent employee number for it, and the full-time equivalent employee numbers for each of its qualifying subsidiaries, must be less than 25 immediately before the relevant shares are issued.

Annual investment amount for each individual investor is £100,000. The issuing company can only subscribe shares up to £150,000 in total.

SEIS income tax relief gives an entitlement to tax reductions in respect of amounts subscribed by individual investors for shares in companies carrying on new businesses. Tax reduction will be given in the tax year the shares are issued. Tax reduction rate is 50%.

This new scheme also provides capital gains relief for individual investors.

If you would like to obtain further information please contact us.

01753 486 777

Age related allowances

When the Chancellor announced his plan in relation to age related allowances, there was much criticism in the press in the name of the “Granny tax”. Despite public outcry the Government decided to go ahead with its plans at the expense of elderly people. Hence, from 6 April 2013 entitlements to age related allowances will be fixed by reference to taxpayers’ date of birth;

  • Those who were born before 6 April 1938 will be entitled to £10,660.00;
  • Those who were born between 6 April 1938 and 5 April 1948 will be entitled to £10,500.00; and
  • Those who were born after 5 April 1948 will be entitled to standard personal allowances that all taxpayers are entitled to.

Following 6 April 2013, these amounts will not be increased annually. However, if a taxpayer earns more than £25,400.00 a year, the age related allowances set out above will be reduced by £1 for every £2, but the amount will not be lower than the standard personal allowance for the current tax year.

01753 486777