tax on termination payments

This post was written by Fionnuala Lynch.

From 6 April 2011 the PAYE treatment of termination payments to an employee after a P45 has been issued will change. Any employers considering the timing of any imminent dismissals should consider whether it may be better to enter into any compromise agreement or other termination agreement before the end of this tax year. This will not change the actual amount of tax due but will have cash flow advantages for employees on higher rates of tax. As regards payments to be made after 6 April, employers should consider whether it may be better to make the entire payment before the issue of the P45 or structure the payment monthly, post P45.Continue Reading UK Regulations Amending PAYE Treatment of Post P45 Payments

Two recent cases give guidance on the tax treatment of settlement payments on termination of employment. A First-tier Tax Tribunal has, for the first time, laid down the correct approach to apportioning a settlement payment which is to compensate an employee for both discrimination and termination of employment. It was decided in Oti-Obihara v. HMRC that the proper starting point is the amount that can be identified as the ‘employment termination payment’, i.e. the amount which represents compensation for financial loss arising from the termination. The balance, being the compensation for injury to feelings, can be paid free of tax, recognising that it may be appropriate for a larger payment to be made.

In addition, the Court of Appeal in Norman v. Yellow Pages Sales Ltd has held that an employer has no implied duty to apportion a termination payment between taxable and non-taxable elements. The employer is entitled to deduct tax on the full amount (above £30,000), and any dispute over the amount of tax payable is a matter for the employee, not the employer, to pursue with HMRC.Continue Reading UK tax implications for settlement payments in cases of discrimination – recent developments