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HMRC internal manual

Employment Income Manual

HM Revenue & Customs
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Termination payments and benefits: Section 401 ITEPA 2003: General

Section 401 ITEPA 2003Payments and other benefits are only chargeable under the special rules in Section 401 ITEPA 2003 if they cannot be charged to income tax in any other way.

So the first step when a payment is made to an employee that appears to fall within the scope of Section 401 ITEPA 2003 is to consider whether it is in fact chargeable under other provisions (see EIM12810).

In general Section 401 ITEPA 2003 charges tax where payments or benefits are given:

  • in connection with termination of employment (for example, retirement, redundancy, dismissal, death, resignation and so on), or
  • when the nature of the job or pay is changed, or
  • when a periodical payment such as a pension payment payable on retirement is converted into a lump sum (“commutation”)but in

all cases only where no other Section charges the payment or benefit to income tax. So, for example, a payment that compensates for changes in the employment should be considered under EIM00680in order to decide if Section 62 ITEPA 2003 applies and then under EIM21001in order to decide if the benefits code applies. Only if they do not apply should Section 401 ITEPA 2003 be considered.

Commutation payments on which tax is payable under Section 401 ITEPA 2003 will be rare in practice because of:

  • the exception of lump sum retirement benefits from certain schemes (see EIM13660) and
  • the charge that arises under Section 394 ITEPA 2003 in respect of a lump sum paid on, or in anticipation of, retirement (see EIM15000).The full scope of Section 401 ITEPA 2003 is set out at


Note: Section 148 ICTA 1988 (the predecessor of Section 401 ITEPA 2003) was amended by Section 58 and Schedule 9 FA 1998 for receipts on or after 6 April 1998. For details see SE13040.