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Termination payments: Get the details right, part 1by
Sarah Bradford provides an overview of the payments that may be made on the termination of an employment contract and how they should be treated for tax and NI purposes.
As the coronavirus job retention scheme starts to wind down, employers are faced with the difficult decision as to which employees they can bring back to work and whether they need to make any employees redundant.
When an employee is made redundant, there are various payments which may need to be made. Broadly, they can be split into normal payments and payments that the employee receives as a result of the termination (the termination award).
Normal payments are those made to the employee in the general course of their employment including wages, salary and accrued holiday pay. These are treated as earnings from the employment and liable to tax and NI when paid on the termination of employment as if they had been paid to the employee while the employment was ongoing.
Payments made specifically on the termination of employment make up the termination award. This may include pay in lieu of notice, compensation for loss of office, statutory redundancy pay, and non-cash benefits.
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Sarah Bradford BA (Hons) FCA CTA (Fellow) is the director of Writetax Ltd (www.writetax.co.uk) and its sister company, Writetax Consultancy Services Ltd. She writes widely on tax and National Insurance contributions and is the author of National Insurance Contributions 2020/21 published by...