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HMRC internal manual

Employment Income Manual

Termination payments and benefits: types of payment within Section 401 ITEPA 2003

Section 401 ITEPA 2003

### Type of Payment ### Notes
Compensation for loss of office or employment (“golden handshakes”). This represents compensation for loss of the employment. It will often be calculated as damages (see EIM13070).

Payments are sometimes mistakenly called compensation for loss of office. In particular, if a payment has its source in the terms of employment it is not compensation for loss of employment, but rather earnings from the employment chargeable under Section 62 ITEPA 2003 (see EIM00630to EIM00635, EIM12850 and EIM13920).

Compensation for loss of employment by reason of redundancy will always be within Section 401 ITEPA 2003 (see EIM13750).

If compensation appears excessive, see EIM12852.    
  Salary or wages in lieu of notice. Section 401 ITEPA 2003 applies where the employee is entitled only to notice but the employer fails or refuses to give it (see EIM12978).
Note that Section 62 ITEPA 2003 applies if the terms and conditions of employment are the source of the payment (see EIM12976) or if there is a custom or practice (see EIM12977).    
  Damages for breach of contract of employment. Section 401 ITEPA 2003 applies if the payment or benefit is compensation for cancellation of the service agreement (see EIM13922).
See EIM13070 regarding the proper calculation of damages.    
  Redundancy payments. See EIM13750.
  Certain compensation paid under the Employment Rights Act 1996. See EIM12950.

Note that:

  • a gratuity given on or after retirement is taxed under Section 394 ITEPA 2003 in priority to Section 401 ITEPA 2003, see EIM15000 and subsequent guidance
  • a lump sum to commute (replace) a pension or pension rights may be excepted (see EIM13660) or, in the case of a payment to commute pensions from non-approved or employer-financed retirement benefits scheme, chargeable under Section 394 ITEPA 2003 (see EIM15000). Payments chargeable under Section 401 ITEPA 2003 are subject to certain exceptions and reductions, see