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Tax Free Severance Payment

When is a severance payment tax free

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Client wishes to terminate an employee's employment by mutual consent. A payment in lieu of notice would be subject to PAYE. Can a Severance Payment be made tax free so long as it does not exceed £30k?

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By ngaccounts
01st Apr 2020 16:04

Simplistically, a severance payment can be made tax free where it is entirely ex gratia i.e. isn't a contractual requirement & no obligation on the company to do so. Therefore doesn't relate to salary, salary in lieu of notice, holiday pay etc..

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By qhas
01st Apr 2020 19:45

I think that the new regulation that came in on 06 April 2018 might negate that contention?

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RLI
By lionofludesch
01st Apr 2020 20:04

Quote:

Simplistically, a severance payment can be made tax free where it is entirely ex gratia i.e. isn't a contractual requirement & no obligation on the company to do so. Therefore doesn't relate to salary, salary in lieu of notice, holiday pay etc..

Good luck with that.

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RLI
By lionofludesch
01st Apr 2020 16:08

The question to ask, as ng implies, is "Is the payment made under a contractual obligation ?"

If yes, it's taxable.

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By RetiredTax
01st Apr 2020 18:38

I have also seen cases where HMRC argue that if there is an expectation of a severance payment ~ i.e. it is the norm for that employer ~ it is also taxable. That is not brought out in the legislation but ---------------.

I hope this helps

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Psycho
By Wilson Philips
01st Apr 2020 20:43

It’s not clear from the question, but are you suggesting a severance payment in place of PILON? If so, you need to think again.

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By qhas
02nd Apr 2020 08:35

I could stand corrected but I'm not certain whether it matters that it was a PILON or not. I am currently contesting a claim from HMRC who contend that with effect from 06 April 2018 all payments made in connection with the termination of office or employment falls to be taxed under general earnings - Section 401 ITEPA 2003. They contend that payments made prior to 06 April 2018 would qualify for tax free treatment but not if made AFTER 06 April 2018.

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By whitevanman
02nd Apr 2020 09:38

Have you possibly, misunderstood / misheard? The HMRC guidance makes clear that AN ELEMENT of all such payments will be taxable from 2018. That element is, in a way, an amount that would have been pay for a notice period (dare I suggest to catch attempts such as that in the OP). The guidance from EIM12800 on applies.

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Replying to whitevanman:
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By qhas
02nd Apr 2020 11:24

I do apologise if I have misheard or misunderstood. Before you think I am some kind of pillock (!) I was simply quoting direct from the HMRC reply to me as shown below.

Termination payments and benefits: section 401 ITEPA 2003: threshold, exceptions, reliefs and reduction
Sections 402 and 405 to 414 ITEPA 2003
With effect from 6 April 2018, an element of all payments received in connection with the termination of a person’s office, or employment are chargeable to income tax as general earnings. EIM13874 defines the term ‘relevant termination awards’ and explains that relevant termination awards are split into 2 elements:
• post-employment notice pay (PENP)
• termination awards subject to section 403 ITEPA 2003
Payments, or benefits that fall within section 401(1)(b) and (c) ITEPA 2003 and ‘termination awards subject to section 403 ITEPA 2003’ are subject to a threshold (currently £30,000) below which the payments and benefits are not chargeable to income tax as employment income. This threshold does not apply to post-employment notice pay.

They go on to explain that the payment in question does not fall within section 401(1)(b) as per the following extract they sent.

401Application of this Chapter
(1)This Chapter applies to payments and other benefits which are received directly or indirectly in consideration or in consequence of, or otherwise in connection with—
(a)the termination of a person’s employment,
(b)a change in the duties of a person’s employment, or
(c)a change in the earnings from a person’s employment,
by the person, or the person’s spouse [F1or civil partner], blood relative, dependant or personal representatives.

Having studied your post I can only conclude that they are not following their own Guidance Manuals. Having said that I have studied EMI 12800 and on (as recommended by your goodself) and for the life of me I cannot find anything that even remotely states that an ex gratia payment is not taxable. Could you be so kind as to point me to that section you refer to and I can put that to the inspector who is disputing my claim?

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Replying to qhas:
By Duggimon
02nd Apr 2020 12:47

Your first assertion was not a quote from that reply, you misquoted it to change "an element of all payments" to "all payments" which is what whitevanman already pointed out.

It is still possible to have partly tax free redundancy payments, though not if they are PILON.

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By qhas
02nd Apr 2020 13:01

Ah right. Yes I take your point when you mention 'partially tax free redundancy payments.' I didn't get the impression that the OP was referring to Redundancy Payments but perhaps he was. In any event the issue I have with HMRC is nothing to do with Redundancy. It was to do with an Ex Gratia payment to a long serving staff member. Perhaps you could direct me to the relevant HMRC Guidance Note that I can use to support my claim and counter their argument?

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RLI
By lionofludesch
02nd Apr 2020 12:57

" Before you think I am some kind of pillock (!) I was simply quoting direct from the HMRC reply to me as shown below."

Au contraire. You have edited it.

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By qhas
02nd Apr 2020 13:03

Indeed I have unwittingly. But still can't find the Guidance Notes that would counter the argument put up by HMRC

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By qhas
05th Apr 2020 22:29

Any luck with this?

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Psycho
By Wilson Philips
05th Apr 2020 22:52

I really can’t speak for the facts of your own case but the basic premise of the new rules is to look at what the individual would have been entitled to following the date of notice - earnings, PILON or whatever. The amount of that entitlement would be taxable even if claimed to be part of an ex gratia payment.

Under the old rules, an employer could let an employee go with no PILON but making instead a payment for breach of contract (or an ex gratia payment). Such payments were often non-taxable. The new rules prevent that.

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