EIM13500 - Termination payments and benefits: section 401 ITEPA 2003: threshold, exceptions, reliefs and reduction
Sections 402 and 405 to 414 ITEPA 2003
With effect from 6 April 2018, an element of all payments received in connection with the termination of a person’s office, or employment are chargeable to income tax as general earnings. EIM13874 defines the term ‘relevant termination awards’ and explains that relevant termination awards are split into 2 elements:
- post-employment notice pay (PENP)
- termination awards subject to section 403 ITEPA 2003
Payments, or benefits that fall within section 401(1)(b) and (c) ITEPA 2003 and ‘termination awards subject to section 403 ITEPA 2003’ are subject to a threshold (currently £30,000) below which the payments and benefits are not chargeable to income tax as employment income. This threshold does not apply to post-employment notice pay.
There are also exceptions, reliefs and a reduction for all payments and benefits falling within section 401 ITEPA 2003 (including post-employment notice pay), as well as some payments which are defined as not being “benefits”. These exceptions, reliefs and the reduction are set out in the table below.
The reduction relates to “foreign service” (see EIM13700) and must be claimed within 4 years after the end of the year of assessment to which it relates (for claims made before 2 April 2010 the limit is 5 years from 31 January following the year of assessment). All the exceptions are given without a claim if the conditions are satisfied. With effect from 6 April 2018 the exception and reduction for “foreign service” is no longer available for individuals who are resident in the UK for the tax year in which the employment is terminated (see EIM13680).
It is important to make sure that all payments and benefits chargeable to income tax under section 403 ITEPA 2003 in respect of an employment are added together before the threshold is applied. For example:
- a charge on the provision of assets (see EIM13020) must be added to any cash payment, which is a termination award subject to section 403 ITEPA 2003, before the threshold is applied
- payments and benefits must be aggregated in some circumstances (see EIM13530)
| Threshold, exception, relief or reduction etc | Notes | Guidance |
|---|---|---|
| £30,000 | General threshold for charges within section 401 ITEPA 2003. This threshold does not apply to any amount of post-employment notice pay. | EIM13505, EIM13550, EIM13874 |
| Death | Exception for payment or benefit given when employment is terminated by employee’s death | EIM13600 |
| Injury and disability | Exception where payment or benefit given on account of physical injury to, or disability of, an employee | EIM13610, EIM13650 |
| Lump sum from retirement benefit scheme | Does not exempt a lump sum from a non-approved or, from 6 April 2006, an employer-financed scheme (see EIM15000 onwards) | EIM13660 |
| Lump sum from overseas retirement benefit scheme | Extra-Statutory Concession A10 | EIM13670 |
| Indemnity insurance | EIM13675 | |
| Benefit from an overseas territory | EIM13710 | |
| H M Forces payment | EIM13720 | |
| Double taxation | EIM13730 | |
| Contribution to approved retirement benefits scheme | Includes a registered scheme from 6 April 2006 | EIM13735 |
| Payment to meet legal costs connected with termination | Extra-Statutory Concession A81 | EIM13740 |
| Outplacement counselling | EIM13745 | |
| Additional lump sum compensation payment | Payable to civil servants and ex-civil servants with retained rights from 1987 | EIM13747 |
| Foreign service | A full exception may be available. With effect from 6 April 2018 this exception no longer applies if the employee, or former employee is UK resident for the tax year in which the employment terminates. | EIM13680, EIM13690 |
| Foreign service reduction | Reduces the amount of the payment that is chargeable. With effect from 6 April 2018 this reduction no longer applies if the employee, or former employee is UK resident for the tax year in which the employment terminates. | EIM13700 |
| Benefits connected with taxable cars, vans and HGVs | Exempt these benefits when given as part of a termination package. They are benefits that would be exempt if given during employment*. | EIM21781, EIM22710, EIM22992 |
| Benefits connected with provision of a mobile phone (where made available without any transfer of the property in it) | Exempt these benefits when given as part of a termination package. They are benefits that would be exempt if given during employment*. | EIM21780, EIM21781 |
* for each of these benefits, assume that it is received for duties of the employment when applying the guidance
These exemptions, reliefs and reductions may prevent a charge arising under section 401 but for tax years in which the individual was an employee you should consider whether a charge arises under other provisions e.g. as earnings or under the benefits code.