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Termination payments are payments compensating an individual for the loss of their job. They can take the form of cash or benefits in kind. Termination payments 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 covenants

4. •

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

5. •

   termination payments (as within ITEPA 2003, ss 401–416)

The taxation of termination payments is discussed in more detail in the How could a termination payment be taxed? guidance note. You are recommended to read that guidance note before continuing. For the purposes of this guidance note, it is assumed that ITEPA 2003, s 401 applies.

It is the employer’s responsibility to correctly tax the termination payment 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