Taxation of cash employment termination payments

Produced by Tolley in association with

Employment Tax

Guidance

A cash payment received on termination may be taxable depending on the nature of the payment and any available reliefs. To understand whether a cash payment is subject to income tax, see the How could a termination payment be taxed? guidance note.

The termination package may be made up of arrears of salary, bonuses and other sums which the employee is entitled to from the employment or a compensatory sum and other sums only paid because of the termination. Some cash payments may be exempt from tax, see the Non-taxable termination payments guidance note. The references below to termination payments refer to all these payments unless stated otherwise.

Any cash payment of contractual remuneration is to be treated as earnings and taxed through the PAYE system. The payment may also be subject to Class 1 NIC. The collection of income tax and NIC is governed by different rules and also different depending on when the payment is made. For more on the basics of NIC, see the Overview

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Sue El Hachmi

Senior Associate at Osborne Clarke

Sue advises on the design and implementation of employee incentive arrangements for private and public companies, including all types of tax-advantaged plans and bespoke arrangements for senior executives and management. Sue also advises on the incentive-related aspects of corporate transactions and has experience of private equity transactions and public company takeovers, flotations and demergers. Sue is a member of the Share Plan Lawyers Group and a member of the UK BioIndustry Association Finance and Tax Advisory Committee.

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