EIM13985 - Termination payments and benefits: example: foreign service reduction

Section 414 ITEPA 2003

Example 1

The employee is non-UK resident for the tax year in which the employment is terminated. Two out of five years total service is ‘foreign service’ (see EIM13690).

The payment is £100,000 of which £10,000 is post-employment notice pay.

Full exception under section 413 ITEPA 2003 is not available.

Foreign service reduction (see EIM13700) is calculated as follows.

Example	-	-
Payments and benefits within section 401 ITEPA 2003	£100,000
Post-employment notice pay (PENP) (see EIM13872)	£10,000
Less foreign service reduction = £10,000 × 2 ÷ 5	(£4,000)
Amount treated as earnings by section 402B(1) ITEPA 2003	£6,000
Termination awards subject to section 403 ITEPA 2003 (see EIM13872)	£90,000
Less £30,000 threshold (see EIM13700 and example EIM13980).	(£30,000)
The ‘amount charged to tax’ (see EIM13700)	£60,000
Less foreign service reduction = £60,000 × 2 ÷ 5	(£24,000)
Amount chargeable to income tax as specific employment income under section 403 ITEPA 2003	£36,000

Example 2

The employment commenced on 1 June 2008. The employee’s contract provides for a 5-day working week with 20 days holiday – a total of 240 workdays.

The employee arrived in the UK on 1 June 2014. After arriving in the UK, she continued to perform some of her duties overseas, and her salary continued to be paid directly into an off-shore bank account.

The employee became non-resident on 6 April 2018 and her employment was terminated on 31 January 2019.

The amount of ‘foreign service’ (see EIM13690) is calculated as follows.

Period	Residency	Foreign service	Overseas workdays	Total workdays
1 June 2008 to 31 May 2014	Non-resident	The employee is not resident in the UK so section 15 ITEPA 2003 does not apply. Since her duties are performed outside the UK and her earnings are not “relevant earnings” the period counts as foreign service.	1,440	1,440
1 June 2014 to 5 April 2015	Split year, resident from 1 June	The employee works outside the UK for a total of 25 days. The earnings in respect of those workdays are not in respect of duties performed in the UK and are not remitted to the UK, so section 26 ITEPA 2003 allows for ‘Overseas Workday Relief’. Those amounts do not fall within S15 ITEPA 2003 and are not “relevant earnings” so those workdays count as foreign service.	25	200
6 April 2015 to 5 April 2016	Resident	The employee works outside the UK for a total of 35 days. Those workdays count as foreign service as above.	35	240
6 April 2016 to 5 April 2017	Resident	The employee works outside the UK for a total of 36 days. Those workdays count as foreign service as above.	36	240
6 April 2017 to 5 April 2018	Resident	The employee works outside the UK for a total of 40 days but ‘Overseas Workday Relief’ is not available to her because she has been UK resident for the previous 3 tax years. All of her earnings are therefore “relevant earnings” and no part of the period will count as foreign service.	0	240
6 April 2018 to 31 January 2019	Non-resident	The employee is not resident in the UK so section 15 ITEPA 2003 does not apply. Since her duties are performed outside the UK and her earnings are not “relevant earnings” the period counts as foreign service.	200	200

Numerator: 1440 + 25 + 35 + 36 + 0 + 200 = 1,736.

Denominator: 1440 + 200 + 240 + 240 + 240 + 200 = 2,560.

1,736 out of 2,560 days total service is ‘foreign service’.

This equates to 67.8% (which is less than three quarters) so full exception under section 413 ITEPA 2003 is not available.

The payment is £135,000 and post-employment notice pay is nil.

Foreign service reduction (see EIM13700) is calculated as follows.

Example	-	-
Payments and benefits within section 401 ITEPA 2003	£135,000
Post-employment notice pay (PENP) (see EIM13872)	£0
Termination awards subject to section 403 ITEPA 2003 (see EIM13872)	£135,000
Less £30,000 threshold (see EIM13700 and example EIM13980)	(£30,000)
The ‘amount charged to tax’ (see EIM13700)	£105,000
Less foreign service reduction = £105,000 × (1,736 ÷ 2,560)	(£71,204)
Amount chargeable to income tax as specific employment income under section 403 ITEPA 2003	£33,796

Note

The amount treated as earnings by section 402B(1) (‘post-employment notice pay’) is reduced where the employee is eligible for foreign service reduction, as shown in the examples above.

Foreign service reduction 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.