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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: termination agreements include matters other than disability

Section 406(b) ITEPA 2003

EIM13630 (2n d bullet) explained that the disability exception is only available where the payment is wholly on account of disability. Sometimes the termination agreement may indicate that other issues are also being dealt with. If so, an apportionment may be necessary.

For example, the employment contract may provide that on termination for any reason the employee is to receive a specific payment. Tax cases such as Dale v De Soissons (32 TC 118) are authority that such a payment is earnings within s62 ITEPA 2003 and that remains so even if disability triggers the payment.

Many terminations are dealt with by a compromise agreement (see EIM12955) and will refer to claims that the employee has made against the employer before an Employment Tribunal or the Courts. Since the compromise agreement will “settle all claims” it settles those claims and some of them may relate to issues other than disability. It follows that some part of the payment must be apportioned to those claims and taxed accordingly. For example, if a claim for compensation for unfair dismissal has been made to a Tribunal and the compromise agreement “settles all claims” then that claim has been dealt with by the agreement. Part of the payment then relates to compensation for unfair dismissal and falls within s401 ITEPA 2003 but because it is paid for a reason other than disability it cannot qualify for full exception under s406(b) ITEPA 2003. Such apportionments are made on a “just and reasonable” basis.