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HMRC internal manual

Employment Income Manual

Termination payments and benefits: section 401 ITEPA 2003: exceptions: payments on death

Section 406(a) ITEPA 2003

A payment or benefit given in respect of the termination of an office or employment by the death of the holder is exempted from tax under section 401 ITEPA 2003.

However, consider first whether a payment made on an employee’s (or ex-employee’s) death is chargeable under section 394 ITEPA 2003 as a relevant benefit from an employer-financed retirement benefits scheme. This does not require the existence of a formal pension scheme; it can be a quite informal agreement or arrangement, such as a decision at an employer’s meeting to pay a gratuity. (See EIM15020 and the gift example at EIM15310.)

Alternatively, the benefit may be chargeable as section 62 earnings, for example if it’s provided under contractual terms.

Either of these charges will apply in preference to section 401 on termination payments (see EIM12810). So in practice, few payments on death will be within the section 401 charge and exempted by section 406(a).