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HMRC internal manual

Employment Income Manual

HM Revenue & Customs
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Termination payments and benefits: payments made under the Employment Rights Act 1996: general


The Employment Rights Act 1996 (ERA) consolidated earlier employment law, in particular the Employment Protection (Consolidation) Act 1978. It sets out the statutory rights of employees and gives Employment Tribunals power to order employers who infringe those rights to pay compensation.

ERA applies in Great Britain; Northern Ireland has similar legislation.

These compensation payments may be assessable under Section 62 ITEPA 2003 or Section 401 ITEPA 2003 dependant on the particular type of award. It is therefore important to establish the nature of the employee’s claim, and the type of award that the Tribunal orders. These facts are best found by obtaining a copy of the employee’s complaint to the Tribunal and a copy of the Tribunal’s decision setting out the Section or Sections of the Employment Rights Act 1996 under which the compensation is ordered.

Claims may be made under ERA but settled by the parties before an Employment Tribunal makes a decision. The settlement is often in the form of a compromise agreement. EIM12855 has further details about these.

See EIM12960 for more specific details about ERA compensation.

Disputes can arise about how the PAYE Regulations apply to such awards. The Regulations apply in the same way as they do for any other payment. This means that an award of £1,000 does not necessarily mean that the employee receives £1,000. Before making any payment the employer must deduct and account HMRC for whatever PAYE tax is due under the Regulations.