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HMRC internal manual

Employment Income Manual

Employment income: compensation for loss of office

Sections 62 and 401 ITEPA 2003

Payments of compensation for loss of office are chargeable under section 401 ITEPA 2003 (see EIM12852), not section 62 ITEPA 2003 (see EIM00515). However, that label can be applied to a payment when it’s not appropriate: see EIM13005.

Because payments and benefits chargeable under section 401 ITEPA 2003 may qualify for various reliefs (see EIM13500), it’s important to recognise the principles that determine which section applies.

Section 401 applies where an employee receives a payment as compensation for cancellation of a contract, as opposed to receiving something to which contractual terms give entitlement. The former could be:

  • a sum awarded as damages by a court for wrongful repudiation of a contract, or a settlement of agreed damages without court involvement (see EIM13070)
  • a payment made in consideration of the employee giving up all contractual rights and ceasing to give services

Such payments are often described as ‘golden handshakes’. They are not earnings chargeable under section 62 ITEPA 2003 because they are not profits from the employment. They arise from the cancellation of the service agreement. The employee loses his right to continue to be employed and earn remuneration for his services.

Cases in which payments for cancellation of service contracts were held to be not chargeable under section 19(1)1 ICTA 1988 (the predecessor of section 62 ITEPA 2003) are DuCros v Ryall (19TC444), Duff v Barlow (23TC633) and Henley v Murray (31TC351).

Sometimes a lump sum may be paid for more than one reason. It will then need to be apportioned to arrive at the correct treatment of each element, see Wales v Tilley (25TC136) and Carter v Wadman (28TC41).

For guidance on compensation received in connection with the termination of an office or employment the earnings of which have been treated as trading income , see BIM40135 to BIM40140.