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HMRC internal manual

Employment Income Manual

Termination payments and benefits: redundancy payments: Statement of Practice 1/1994: general

Statement of Practice 1/1994 explains that a lump sum payment for redundancy under a non- statutory scheme is within section 401 ITEPA 2003.

EIM13874 explains that 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.

Genuine redundancy payments must be distinguished from other payments (whatever they are called) that may be liable under section 62 ITEPA 2003 (see EIM00515). For example, a payment that is really a terminal bonus (such as for meeting production targets or doing extra work in the period leading up to redundancy) is not compensation for redundancy.

Sometimes an employee on a short-term contract knows when joining the employer that a payment will be received on termination, see EIM13825 for treatment.

Where a redundancy payment is conditional on a short period of continued service leading up to redundancy that of itself should not be treated as excluding section 401 ITEPA 2003 treatment. The distinction to be made is between a payment that:

  • compensates for loss of employment through redundancy and one that
  • constitutes a reward for acting as or being an employee

See example EIM13990.