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HMRC internal manual

Employment Income Manual

Relevant termination awards received on or after 6 April 2018

Sections 402A to 402E ITEPA 2003

By virtue of amendments to the legislation which have effect from 6 April 2018, some termination payments and benefits are chargeable to income tax as general earnings and no longer benefit from the £30,000 threshold available in section 403 ITEPA 2003. The revised legislation applies to termination payments and benefits that meet all of the following criteria:

a) the payments, or benefits fall within section 401(1)(a) ITEPA 2003 i.e. they are received directly, or indirectly in consideration or in consequence of, or otherwise in connection with the termination of a person’s employment

b) the payments, or benefits are received on, or after 6 April 2018

c) the employment was ended on, or after 6 April 2018

d) the payments, or benefits are not statutory redundancy payments, or approved contractual payments to the extent that they are exempt under section 309 ITEPA 2003 (see EIM13760)

e) the payments, or benefits are not chargeable to income tax by virtue of any provision other than in Chapter 3 of Part 6 ITEPA 2003 (see EIM13000)

Termination payments and benefits, which meet all of the above criteria are ‘relevant termination awards’. These ‘relevant termination awards’ are split into 2 elements:

  • post-employment notice pay (PENP) (see EIM13876)
  • relevant termination awards subject to section 403 ITEPA 2003 (see EIM13878)

The amount of post-employment notice pay is calculated using the PENP formula. The PENP formula is set out in the legislation at section 402D ITEPA 2003 (see EIM13880). Guidance on the application of this formula is available at EIM13880 to EIM13896.

An employer is required to calculate the amount of post-employment notice pay using the PENP formula whether or not the employee, or former employee receives a contractual, or non-contractual PILON (see the example at EIM14000). The formula takes into account any PILON chargeable to income tax as earnings within section 62 ITEPA 2003 by reducing the amount of post-employment notice pay by the amount of the PILON (see EIM13896).

Statutory redundancy payments and approved contractual payments, to the extent that they are exempt under section 309 ITEPA 2003, are not within the definition of ‘relevant termination awards’. EIM13760 provides guidance on the meaning of statutory redundancy payments and approved contractual payments. 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 (see EIM13750 to EIM13802). They should be added to the amount of ‘relevant termination awards subject to section 403 ITEPA 2003’ before the £30,000 threshold is applied.

Payments and benefits received in connection with a change in the duties of a person’s employment (section 401(1)(b) ITEPA 2003), or a change in the earnings from a person’s employment (section 401(1)(c) ITEPA 2003) are still chargeable to income tax as specific employment income and benefit from the £30,000 threshold. They should be added to the amount of ‘relevant termination awards subject to section 403 ITEPA 2003’ before the £30,000 threshold is applied.

The exceptions, reliefs and reductions available in sections 405 to 414A ITEPA 2003 apply to qualifying termination payments and benefits which fall within section 401 ITEPA 2003, including ‘relevant termination awards’ (see EIM13500 for a list of these exceptions, reliefs and reductions).

For a worked example of the PENP formula, see EIM14000.