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World mental health day
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World Mental Health Day: 10 October 2021

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To mark World Mental Health Day, Reshma Johar focuses on termination payments made in respect of injury or disability of an employee.

7th Oct 2021
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It is said that one in four people experience a mental health problem each year. Since the coronavirus pandemic many of us, including myself, have experienced some form of anxiety, depression, mental exhaustion or even suffered a breakdown. These emotions may have already been in existence prior to the pandemic and had since been exacerbated.

As well as managing personal mental health, many of us are also caring for and supporting others who are experiencing some form of mental health problem.

Unemployment or the risk of losing work has a detrimental impact on mental health. According to the Health Foundation: “In January 2021, 43% of unemployed people had poor mental health. This was greater than for people in employment (27%) and for people who were on furlough (34%). This suggests that furloughing has provided some protection for mental health.”

Some 11.6 million people were put on furlough at one point or another since March 2020. The furlough scheme ended on 30 September, which leaves employers with a decision as to whether to return their employees to full time employment or to consider making them redundant.  

Termination package

A termination payment or a benefit in kind will only be chargeable within the given termination provisions of s 401 ITEPA 2003, if the termination payment is in respect of a person’s employment, or there is a change in duties, or a change in the earnings from a person’s employment. Effectively, S401 applies only where no other section charges the payment of benefit in kind to income tax.

A termination package can include both cash and benefits in kind, each could be subject to income tax and national insurance. Examples of what can form part of a package includes; contractual or non-contractual payment in lieu of notice, payments into a registered pension scheme, a restrictive covenant. 

The cash or benefit in kind could also fall within either the £30,000 threshold or be completely exempt from both tax and national insurance. Examples of items falling within S401 ITEPA 2003, subject to the Post-Employment Notice Pay (PENP) rules as well as the £30,000 limit, include damages for a breach of contract, ex-gratia payment and statutory redundancy pay.

Employees receiving a termination package should seek to understand the nature of each element of the package, alongside any terms being applied, which may also be dependent on the reason for the termination.

The employer will be responsible for applying the correct tax on any termination payment.

Fully exempt termination packages

The following will be completely exempt from income tax and national insurance. Furthermore, it will not impact the £30,000 threshold.

  1. Payment made on death of an employee
  2. Payments made on injury or disability
  3. Payments into a registered pension scheme

Payments made on injury or disability

This exemption will only apply to payments provided ‘on account of’ the injury or disability. It must be demonstrated that the payment motive is because of the injury or disability.

Within the HMRC statement of Practice 10/1981, the meaning of disability is as follows:

“Disability means an incapacity to fulfil the duties of an office or employment caused either:

  • by a sudden affliction (such as a heart attack), or
  • by the culmination of a process of deterioration of physical or mental health caused by a chronic illness (such as chronic fatigue syndrome)

but not by the normal processes of ageing.”

The provision which outlines the exemption, falls under S406 ITEPA 2003. The provision does not stipulate that the injury or disability needed to have been sustained at work.

Since 6 April 2018, the provision has clarified ‘injury’ as being either physical or psychological, but also stipulates that it does not include injury to feelings. Prior to 6 April 2018, there had been cases in favour of recognising injury to feelings for the purposes of this exemption. However, in Moorthy v HMRC [2018] STC 1028, the court did not comment on whether the injury to feelings would fall within the exemption had there been no statutory discrimination claim.

It may be necessary to support a claim under this exemption with medical evidence, which could include sickness absence records. If in doubt, employers can obtain an advance clearance from HMRC.

Final comment

For me the positives taken from the pandemic has been to take better care of myself and to not take for granted, my own mental health. This can be as simple as taking a walk without your phone at lunchtime, reading a cheesy novel or meeting a friend for a catch up. 

Many employers, including where I work at Carter Backer Winter LLP have been actively discussing mental health and offering support and techniques that can be used to support one’s own self-care as well as supporting others. I for one have been enjoying the Headspace app (there are other apps around), for meditation, yoga, exercise and general check in’s, when I feel a little overwhelmed.

World Mental Health Day

This is an international day raising awareness through education and advocacy against social stigma associated with mental health.

Useful mental health and wellbeing websites

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To encourage the conversation around mental health, our AccountingWEB Live Expo will be holding a wellbeing panel with guests such as Lucy Cohen, Lianne Weaver and Emma Chesson.  AccountingWEB Live Expo takes place on 1-2 December 2021 at Coventry Building Society Arena, Coventry. Registration is now open. 

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