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Termination payments are payments compensating an individual for the loss of their job. The law on termination payments also covers payments for varying the terms of an individual’s employment relating to their pay and duties (which can include loss of rights).

Termination payments can take the form of cash or benefits in kind. The payment will either be fully taxable, partially taxable, or fully exempt depending on the nature and the amount of the payment.

Depending on the circumstances, termination payments can be treated for tax purposes as:

1. •

   earnings

2. •

   benefits in kind

3. •

   restrictive undertakings

4. •

   benefits from an employer-financed retirement benefits scheme (EFRBS)

5. •

   termination payments (see the Termination payments ― overview guidance note)

It is the employer’s responsibility to tax the termination payment correctly and therefore the employer bears the risk of tax and penalties if the treatment is wrong. This is an area where HMRC sees frequent mistakes in the tax treatment and it has targeted such payments in the past.

The tax analysis of an individual’s termination