CH 23 - Termination Payments Flashcards
When a termination payment (other than a redundancy payment) is fully taxable?
A termination payment (other than a redundancy payment) is fully taxable if it is:
* a reward for services performed (past/present/future);
* contractual;
* expected (reasonable expectation that it will be received);
* garden leave;
* PENP (post-employment notice pay).
Subject to Class 1NIC (also certain payments from EFRBS)
When a termination payment is fully exempt?
A termination payment is fully exempt if it is:
- on death/injury/disability;
- a payment into a registered pension scheme;
- provision of outplacement counselling or a retraining course (1)
1) employee must have been employed for at least 2 years and the benefit must be available to all employees (specific class of employees).
(ITEPA 2003, s.406) & s.408
Which termination payments are only taxable to the extent of £30,000?
First £30k of payment is exempt and rest is taxed if payment is not contractual and is voluntary, e.g.;
* Ex gratia payment
* compensation for loss of office
* redundancy payments
Such earnings are not taxed as earnings
Subject to Class 1a NICs (excess over £30k) (no NICs for employees)
What is PENP?
When it needs to be calculated and how?
post-employment notice pay (PENP)
* is the basic pay an employee would have received had they worked for the full duration of their notice period
When employer terminates employment beofre notice period
[(BPxD) / P] - T
BP - Basic pay before notice is given
D - no of days in the ‘post-employment notice period’
P - days in the pay period immediately preciding the period in which the termination payment was made
T - amount paid on termination that are already taxable as earnings (excl. hoilday and termination bonuses)
What is EFRBS?
Employer Financed Retirement Benefit Scheme (EFRBS)
Does s.401 ITEPA 2003 applies on EFRBS?
No
Payments made directly by employers to employees on retirement are likely to be treated as fully taxable with no £30,000 exemption, as payments from an Employer Financed Retirement Benefit Scheme (EFRBS).
What tax code is used via PAYE if payment is made;
* before the P45, and
* after the P45
- before P45, usiging relevant tax code
- after P45, using 0T (1/12 of tax bands)
Taxable amounts are taxed as the highest part of income.
What are Exempt Benfits as a part of termination package?
Provided certain conditions are met, payments in respect of the following are exempt benefits:
* Employee’s legal costs in relation to a dispute on termination. (ITEPA 2003, s.413A)
* Outplacement counselling and related travel costs. (ITEPA 2003, s.310)
* Retraining courses. (ITEPA 2003, s.311)
