Termination Payments

Flashcards covering key concepts related to termination payments and their tax implications.

What are the typical elements of termination payments?

Accrued holiday pay, compensation for loss of office, payments in lieu of notice.

What legislation outlines exemptions for termination payments?

ITEPA 2003, ss.401-416.

Are redundancy payments always taxable?

Yes, unless they fall under the £30,000 exemption.

What is the £30,000 rule in relation to termination payments?

The first £30,000 of a genuine termination payment is tax-free.

What are post-employment notice payments (PENP)?

Wages owed during the notice period after termination.

What happens to payments connected with employment?

They are generally regarded as taxable unless they fall under specific exemptions.

What is the implication of a restrictive covenant in termination payments?

Payments for restrictive covenants are fully taxable under PAYE and Class 1 NICs.

What distinguishes statutory from non-statutory redundancy payments?

Statutory redundancy is a fixed amount paid under employment law; non-statutory is any voluntary additional amount.

Are retirement payments taxable?

Yes, unless they qualify as an excluded benefit for reasons like ill health.

What must HMRC show to assert an employee's reasonable expectation of termination payments?

Evidence from past practices or precedents.

What should happen if an employee has not been UK resident throughout employment?

Potentially affects the taxation of their termination payments.

What must be true for a payment due to disability to be exempt from tax?

There must be a physical or psychological injury preventing job performance.

What occurs if termination payments are made before a P45 is issued?

Tax must be deducted from the excess over £30,000 under the employee's normal tax code.

What determines if a termination payment is made in lieu of notice?

If it compensates directly for the notice period instead of allowing the employee to work.

How is the PENP calculated?

Using the formula BP x D - T, where BP = basic pay, D = days in notice period, T = amounts already taxed.

What are continuing benefits in relation to termination payments?

Benefits provided after termination, taxed in the year received if taxable.

What is the effect of foreign service on termination payments?

Non-UK residents may qualify for exemptions if foreign service exceeds specified limits.

What is outplacement counselling in termination packages?

Professional services paid for by the employer to help employees adjust and find new jobs.

How are legal costs treated when recovering compensation for loss of employment?

Taxable under ITEPA, except under specific conditions of court settlements.

What is the tax treatment of company cars gifted in termination packages?

Valued at the gift date and treated as a cash payment for tax purposes.

What must employers report if the termination package exceeds £30,000?

A detailed report to HMRC including the total value of cash and benefits.

Are payments to registered pension schemes part of termination packages taxable?

No, they are completely free of tax.

What is the impact of termination payments on employer's taxable profits?

They are deducted like any other salary payment from taxable profits.

What happens if termination payments exceed the £30,000 exemption threshold?

Only the portion above £30,000 is taxed as the top slice of income.

What obligations do employers have regarding the classification of termination payments?

To accurately categorize payments to ensure correct tax treatment.