Taxation of termination payments

Businesses should take note of a First-tier Tribunal (Tax Chamber) ruling which held that the first £30,000 of an interim payment awarded by an employment tribunal to an appellant was exempt from income tax. This was on the basis that the payment arose from termination of employment rather than from the employment itself. Employers will need to ensure that interim payments made in excess of £30,000 are subject to PAYE (assuming that the employee has not used any part of the £30,000 exempt amount previously).

The Office of Tax Simplification has recently published its final report on employee benefits and expenses that includes recommendations to simplify the taxation of termination payments.