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HMRC internal manual

Employment Income Manual

Termination payments and benefits: introduction: applying the legislation

Sections 62, 225, 394 and 401 ITEPA 2003

Having found what each element of a termination package is for (see EIM12805), each element should then be looked at separately following the structure set out below.

Note that there is a self-contained set of statutory rules to deal with receipts from non-approved and employer-financed retirement benefits schemes (Section 394 ITEPA 2003). Guidance on this is at EIM15010 onwards. If those rules apply, you need not consider the Sections below.

  • first, consider Section 62 ITEPA 2003: is the payment or benefit earnings from the employment? See EIM12850 for the more common termination payments that are within Section 62. Material on earnings generally is at EIM00600and subsequent guidance, particularly EIM00530 regarding non-money receipts. If Section 62 does not apply,
  • second, consider Section 225 ITEPA 2003: is the payment or benefit for a restrictive covenant? See EIM03600 onwards. If not,
  • last, and only if no other Income Tax charge applies (see the last bullet below), consider Section 401 ITEPA 2003: is the payment or benefit made in connection with termination? See EIM12850 onwards. Note: it is common for benefits (such as use of a car or medical insurance) to continue through the termination of the employment. See EIM12815 for details of how these are taxed.

There is a typical example of this process at EIM13900.

Note that:

  • redundancy payments (as defined in EIM13800) will always be within Section 401 ITEPA 2003 (see EIM13000 onwards)
  • a lump sum from an approved or registered retirement benefits scheme is exempt from tax. Pensions Schemes (Technical Advice) can advise concerning such schemes
  • Section 401 ITEPA 2003 applies only if there is no other charge to income tax. Apart from Sections 62, 225 and 394 ITEPA 2003 mentioned above, other Sections may apply before s401 in particular situations. For example, compensation for loss of a share option on termination (see ERSM110030) and annual payments (see SAIM8020)