Termination payments and benefits: redundancy: general
With effect from 6 April 2018, some termination payments and benefits are chargeable to income tax as general earnings and do not benefit from the £30,000 threshold available in section 403 ITEPA 2003.
EIM13874 defines the term ‘relevant termination awards’ and explains that relevant termination awards are split into 2 elements:
- post-employment notice pay (PENP)
- termination awards subject to section 403 ITEPA 2003
Statutory redundancy payments and contractually approved payments (see EIM13760) are not within the definition of ‘relevant termination awards’ (see EIM13874). These payments are always chargeable to income tax as specific employment income and benefit from the £30,000 threshold available in section 403 ITEPA 2003.
A common reason for the termination of an employment is redundancy. Redundancy has a special meaning, which is set out at EIM13800.
The Employment Rights Act 1996 provides that employees made redundant must receive a minimum level of compensation for that redundancy. This is called a statutory redundancy payment, for further details see EIM13760.
In addition, many employers provide an additional payment for the same reason. This is called a non-statutory redundancy payment, for further details see EIM13775 and subsequent guidance.
The significance of redundancy payments is that they are always charged to tax under section 401 ITEPA 2003 (see EIM13000 onwards). The case of Mairs v Haughey (66TC273) held that such payments, even where provided for under contractual terms, are not earnings from employment within section 62 ITEPA 2003(see EIM00515).
It’s vital to identify redundancy payments properly because:
- what people call redundancy payments may not be within the special definition of redundancy in EIM13800
- redundancy usually involves other payments being made as well as those for the redundancy itself. For example payments in lieu of notice are often made at the same time (see EIM12975). Consider the whole package of payments and benefits under EIM12810 to make sure that no other charges are missed.