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Possible Termination Payment on Retirement

Possible Termination Payment on Retirement

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An employer would like to make a payment to an ex employee on his retirmement.

How can the payment be made to ensure it falls under S148, safeguarding the £30000 exemption, rather than being taxed in full under S19?

As in understand it, a payment is charged under S19 if it is made in return for services, so if a payment is made on retirement:

a)which is non-contractual
b)of which there was no 'reasonable expectation' of receipt, i.e. was not implied or habitual
c)and is not specified as being in recognition of service

it should not fall within S19, but instead under S148, so the first £30,000 received will be exempt?

But by its nature, it seems extremely difficult to prove that a payment on retirement is not in recognition of services, so this could leave the payment subject to S19.

It does appear this be achieved, by delaying the payment until after termination of the employment, how safe is this?

Another problem is that since the issue of SP 13/91 the Revenue seem to have looked more closely at ex-gratia payments (or retirement and death) and have often regarded these as 'relevant benefits' as defined in S612:

As a result, the payments have been deemed as arising from an 'unapproved retirement benefits scheme', leaving the income taxable under S596A and the £30K exemption not available.

SP1/94 confirms that genuine redundancy payments will be taxable under S148, but that payments not genuinely made to compensate for loss of employment through redundancy may be liable to tax in full

The Revenue's own manuals highlight the importance of recognising the principles determining which section applies, due to the exemptions available under S148.

SE2100 confirms that the term 'compensation for loss of office can be applied to inappropriate payments' and this point is then expanded on further, with guidance on the types of payments that could be regarded as contractual and the most common types of payments taxable in under S19

Any help will be gratefully received!



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24th Mar 2003 15:36

Ex Gratia payment
If tax relief for the payment is not an issue why not just make an ex gratia payment to the retiring employee making sure not to say it is due to past services etc. Merely a non statutory payment whre there is no contractual right for the individual to receive this payment, neither is there a compulsion on the employer to provide any payment in lieu of notice in the employee’s contract.

You could then seek a clearance from HMIT that it would be helpful to ensure correct treatment for PAYE if they would please consider the situation and confirm as to whether the lump sum payments under the scheme will be accepted as liable to tax under Section 148 Taxes Act 1998.

NB Non statutory redundancy may also be included under S148. If you could get agreement to treating it as non statutory redundancy then you may be able to get a deduction for the expense int he accounts.

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By lfidler
21st Mar 2003 09:48

(Effective) tax-free lumps sums on retirement are rare
SP13/91 sets out the IR's view on lump sum payments on retirement or death and states that they WILL be regarded as 'otherwise chargeable' in relation to section 148. Section 148 only comes into effect, bringing its £30,000 exemption with it, if the payment or other benefit is 'NOT otherwise chargeable to tax.' I think you would have difficulty getting an inspector to ignore the provisions of SP13/91.

Possible ways of getting a tax-free amount to an employee on retirement include:
- redundancy (but this needs to be genuine, statutory redundancy)
- when it is not retirement at all (best demonstrated by hindsight when the sprightly individual has embarked on a new, successful career, or at least has another full-time job)
- using paras 6-8 of SP13/91
- employer's pension contribution

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By Anonymous
21st Mar 2003 11:57

Try sacking with gardening leave?
Suppose the individual is given notice some time before normal retirement, and strictly held to his notice period, by imposing"gardening leave". there is at least a fighting chance that a payment in connection with that dismissal is manifestly not in connection with retirement, so not within s.612.

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