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HMRC internal manual

Employment Income Manual

Termination payments and benefits: example: section 401 ITEPA 2003: in connection with

Section 401(1) ITEPA 2003

The phrase in connection with (see EIM13012) is one of very wide scope. The full phrase is

“either directly or indirectly in consideration or in consequence of, or otherwise in connection with, the termination or change”.

Example 1

An employee is dismissed and given £20,000 as compensation for loss of office. The payment was made in full before 6 April 2018 and the facts show that it’s not taxable other than under section 401 ITEPA 2003. That section can apply because the payment is in connection with the termination.

Example 2

An employee is dismissed on 3 November 2011. The company wants to make sure that there is a complete break and so insists that all the employee’s shares in the company are sold.

The employee protests about the costs and the possible loss of future gains on the shares. It’s agreed that the shares will be sold but the company will pay £10,500 as compensation.

The sale price received by the employee for the shares is not a payment in connection with the termination. Although the sale was required by the termination agreement, the transfer of ownership of the shares, rather than the loss of employment itself, wholly explains the payment. So none of that receipt came to the employee even indirectly as a payment for the termination itself. The payment arose as a consequence of the sale; all that arose as a consequence of the termination was a requirement to sell the shares, and that requirement of itself yielded no payment.

By contrast, the compensation of £10,500 is in connection with the termination. None of this payment represents the value of the shares. Its receipt is wholly explained by the company’s decision to make a payment to settle claims arising from the termination agreement.