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Tax on Termination Payments

We are employment solicitors advising on Settlement Agreements in Central London.

Does tax need to be paid on the sums received under Settlement Agreements?

 

 

Very much in summary,  statutory redundancy payments and non-contractual or ‘ex gratia’ payments on termination of employment can be paid without deductions of tax or National insurance of up to £30,000.

However payments in lieu of notice must be taxed in all circumstances applying a formula as follows:

Relevant Termination Award: From 6 April 2018 if an employer pays a “relevant termination award” to an employee, the employer has to calculate how much of the relevant termination award is “post-employment notice pay” (“PENP”).

relevant termination award (‘RTA’) is any payment or benefit which compensates the individual for the termination of their employment (i.e. those payments and benefits which prior to 6 April 2018 would have qualified for the £30,000 tax exemption), excluding any statutory redundancy pay.

The RTA is the total severance payment (including contractual/non contractual payment in lieu of notice) of  £ ……..… minus £ ………… (stat red pay).

Post Employment Notice Payment (‘PENP’) This subject to income tax and NICs in full.

The formula for the PENP:  BP x D     – T =     £

P

  • BP: Basic Pay:                                                            £……………….  (pm / pw)
  • D: Days in the Post Employment Notice Period:     …………………
  • P: Days in the last Pay Period:                                  …………………  (ie 31 or 30 or 7 days as appropriate)
  • T:  Contractual Payment in Lieu of Notice:              £…………………

Meaning:

  • Statutory redundancy payment of £………. benefits from the £30,000 tax exemption and 100% NICs exemption.
  • PENP of £…….… is subject to tax and NICs in full (capped at not more than RTA).
  • Contractual PILON (if applicable) of £…….… is subject to income tax and NICs in full.
  • The balance of the RTA of £….….. (the RTA minus the PENP) benefits from the £30,000 tax exemption and 100% NICs exemption.

Common Questions regarding Settlement Agreements

For advice on redundancy please click ‘redundancy

 

 

 

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