EIM13692 - Foreign service: interaction with PENP

With effect from 6 April 2018, ‘termination awards’ (see EIM13872) are split into 2 elements:

  • termination awards not benefiting from the £30,000 threshold and treated as general earnings (see EIM13874)
  • termination awards subject to section 403 ITEPA 2003 (see EIM13876)

With effect from 6 April 2018, exception from and reduction of income tax are no longer available where certain criteria are met. EIM13680 and EIM13700 list these criteria and the circumstances in which the exception and reduction are no longer available.

Where the exception from and reduction of income tax for “foreign service” are no longer available because the employee or former employee is UK resident for the tax year in which the employment was terminated consider the following treatment.

Post-employment notice pay (PENP)

Post-employment notice pay (PENP) is part of the element of the termination award which does not benefit from the £30,000 threshold and which is chargeable to income tax as general earnings for the tax year in which the employment ended. Section 15 ITEPA 2003 applies to general earnings for the tax year in which the employee is resident in the UK (see EIM40101 and RDR1 for further guidance on the application of split year treatment). In the case of a split year, a charge to income tax does not arise if the general earnings are attributable to the overseas part of the split year. Any attribution should be done on a just and reasonable basis.

Termination awards subject to section 403 ITEPA 2003

Termination awards subject to section 403 ITEPA 2003 are chargeable to income tax as specific employment income. The rules in Chapters 4 and 5 of Part 2 ITEPA 2003 don’t apply to specific employment income. The amount of the termination award is chargeable to income tax irrespective of the employee, or former employee’s residence status. However, in these circumstances it is necessary to consider any double taxation agreement (DTA) provisions in place (see EIM40601 and EIM13695) and the OECD commentary in Article 15 in respect of termination payments as appropriate (see EIM13698). These documents will determine which country has taxing rights over the income and how employers should comply with UK PAYE and foreign withholding tax requirements.

Foreign Service Relief is only available where the employee is non-UK resident for the tax year in which the employment terminates. EIM13877 explains the chargeability of post-employment notice pay for non-UK resident employees.