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HMRC internal manual

Employment Income Manual

Termination payments and benefits: section 401 ITEPA 2003: foreign service: reduction of charge

Section 414 ITEPA 2003

EIM13690 explained that if an employee whose service includes ‘foreign service’ fails to satisfy the conditions for full exception, the employee might still qualify for a reduction in the charge to income tax for payments and other benefits that fall within section 401 ITEPA 2003.

With effect from 6 April 2018, the same restrictions apply to the availability of this reduction as apply to the full exception for “foreign service” (see EIM13680). A reduction of the charge to income tax is no longer available for payments or other benefits that fall within section 401(1)(a) ITEPA 2003, where all of the following criteria are met:

  • the employee, or former employee is UK resident for the tax year in which the employment terminates (see EIM42800)
  • the employment is terminated on or after 6 April 2018
  • the payment or other benefit is received after 13 September 2017

However, the legislation, which removes the reduction in the circumstances above does not apply if the service of the employee or former employee includes ‘foreign seafaring service’ (see EIM33101).  So, on, or after 6 April 2018, a reduction in the charge to income tax remains available for payments, or benefits received in connection with the termination of a person’s employment if that employment included ‘foreign seafaring service’. EIM13685 includes the definition of ‘foreign seafaring service’.

If service before 6 April 1974 is involved, see EIM13705.

EIM13702 explains how the reduction applies where the employee or former employee is eligible for the reduction and their employment included ‘foreign seafaring service’.

Where an employee or former employee is eligible for the reduction and their employment included ‘foreign service’ follow the rules below.

The reduction for ‘foreign service’ does not apply to the element of any termination payment that is post-employment notice pay (PENP) (see EIM13872). The reduction only applies to the element of the termination payment which is subject to section 403 ITEPA 2003 (see EIM13872).

The £30,000 threshold must be deducted before calculating the reduction (see example EIM13980). The result, for this purpose, is called the ‘amount charged to tax’ (in section 414(2) ITEPA 2003 it is called the amount that would otherwise count as employment income).

The amount of the reduction is the ‘amount charged to tax’ multiplied by the length of ‘foreign service’ and divided by the length of total service before the relevant date (the meaning of relevant date is the same as in EIM13680). It is this “amount charged to tax” that is reduced if the qualifying conditions are met. See the example at EIM13985.

Note: The taxpayer can claim the foreign service reduction by notice in writing at any time up to 4 years from the end of the year of assessment to which the claim relates (for claims made before 2 April 2010 the limit is 5 years after 31 January following the end of the relevant year of assessment).