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HMRC internal manual

Employment Income Manual

Termination payments and benefits: example: compensation for loss of office

A contract of employment states that it will continue for 5 years from 1 January 1999. The employer can end it before that date provided that the employee is paid £10,000 as compensation for loss of office.

The employer dismisses the employee on 31 December 2002 and pays £10,000. It is claimed that this sum is simply agreed compensation for the loss of the employment and as such is taxable only under Section 401 ITEPA 2003 (see EIM12852).

The termination payment falls within Section 62 ITEPA 2003 (see EIM00515) even though it is payable only at the end of the employment. This payment is part of the terms and conditions agreed between employer and employee for the giving of services and so is part of the bargain struck for those services. It is essentially further salary for those services, albeit deferred until the end of the employment. As such, it is an emolument from the employment.

If the termination provision was not in the contract document but contained only in a letter of appointment, the conclusion would be the same. Such a letter is part of the terms agreed between employee and employer governing the employment.

The same is usually true of other provisions that have that effect, such as provisions in a staff handbook. (This content has been withheld because of exemptions in the Freedom of Information Act 2000)

See also EIM13922.