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HMRC internal manual

Employment Income Manual

HM Revenue & Customs
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Employment income: earnings from employment: sums paid under the terms of a contract of employment

Section 62 ITEPA 2003

A payment made under the terms of a contract of employment is taxable as earnings within Section 62 ITEPA 2003 if it is part of the remuneration for the employee’s services. This is so even if the contract describes the payment as something else. For example, a contractual termination payment may be mistakenly described as compensation for loss of office. Such a payment is nevertheless taxable in full as earnings within Section 62 (see EIM00510).

You may have to look beyond the bare contract of employment to decide if a payment iscontractual. Additional terms and conditions may be found in such things as staffhandbooks and wage negotiation agreements. In the case of a director with no writtenservice agreement, you may have to look at the company’s articles of association to findout what is due.

Decided cases that illustrate that a sum payable under a contract of employment is taxableas earnings include:

  • Henry v Foster (16TC605), see example EIM00635
  • Allen v Trehearne (22TC15)
  • Dale v De Soissons (32TC118)
  • Williams v Simmons (55TC17).

Payments made under the terms of a contract of employment must be distinguished from payments that are made because the contract is cancelled altogether. See ‘Compensation for loss of office’ at EIM02100.

As regards payments made as a result of the termination of an employment due to the deathor disability of an employee, see EIM13600.

Note that a genuine redundancy payment, whether contractual or not, does not countas earnings within Section 62 (see EIM13750).