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HMRC internal manual

Employment Income Manual

Termination payments and benefits: section 401 ITEPA 2003: exceptions: payments on account of injury or disability: general

Section 406(b) ITEPA 2003

A termination (or change) payment or benefit is excepted from tax under section 401 ITEPA 2003 (see EIM13000) if it is paid wholly on account of:

  • an injury to an office-holder or employee, or
  • the disability (see EIM13620) of such a person

“Injury” is construed as either physical or psychological injury. Legislation introduced on 6 April 2018 confirmed HMRC’s longstanding view that “injury” includes psychiatric injury but does not include injured feelings.

Normally the injury or disability causes the termination (or change in duties or earnings) and the payment is made on account of the injury or disability (see EIM13630). Exceptionally, the injury or disability may not cause the termination etc but the exception will still be due provided that the payment is made in connection with the termination and solely on account of the disability.

EIM13635 sets out a typical scenario for a disability payment and see EIM13630 concerning the tests that must be satisfied for the exception to apply.

Note: if the employment continues, liability under the benefits code (see EIM21006) must be considered before section 401 ITEPA 2003.