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HMRC internal manual

Employment Income Manual

HM Revenue & Customs
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Tax treatment of Local Authority officials and employees: redundancy payments

An employee of a Local Authority, River Board, Harbour Board or other similar body who becomes redundant may qualify for compensation under one or more of the Regulations made under Section 259 Local Government Act 1972, Section 24 Superannuation Act 1972, or similar Acts. The names by which the various types of compensation are known, and their treatment for tax purposes, are as follows:

  • re-settlement compensation is chargeable under Section 401 ITEPA 2003 (see EIM13000) provided that it is not paid for more than 52 weeks. (This content has been withheld because of exemptions in the Freedom of Information Act 2000)
  • long-term compensation in the form of annual periodical payments gives rise to liability to income tax (see McMann v Shaw (48TC330)). In practice the payments are dealt with under PAYE unless the payer or payee objects.
  • retirement compensation and widow’s compensation are chargeable as a pension under normal employment income rules (see EIM74001). Where, however, a lump sum retirement payment represents part commutation of a pension payable under a superannuation scheme, see EIM13660.
  • compensation for premature retirement may take the form of either lump sum compensation or annual compensation. The former is chargeable under Section 401 ITEPA 2003 (see EIM13000) and as regards possible exemption see EIM13660. Payments of annual compensation are dealt with as for long-term compensation above.
  • redundancy and reorganisation compensation under the Local Government (Compensation for Redundancy) Regulations 1994 is chargeable under Section 401 ITEPA 2003 (see EIM13000).