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HMRC internal manual

PAYE Manual

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HM Revenue & Customs
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PAYE operation: lump sum termination payments: how employers operate PAYE on termination payments

The Employment Income (EIM) Manual at EIM12805 onwards tells you about the tax treatment of lump sum termination payments.

A payment or benefit within Section 401 ITEPA 2003 is employment income of the year in which it is received. EIM13110 defines when it is received.

For taxable amounts, the PAYE procedure an employer must follow depends on when and how the payment is made.

Taxable termination payment is made before form P45 is received

The employer must

  • Add the amount to gross pay and apply normal PAYE procedures
  • Notify the Tax Office, in cases where packages of over £30,000 are taxable, of the

    • Amount of the payment
    • Date of the payment
    • Tax deducted

Termination payment is made after employment has ceased and form P45 has been issued

The employer must

  • Deduct tax from the taxable amount using code 0T on a week 1 / month 1 basis or S0T on a week 1 / month 1 basis where the employee is liable to pay tax at the Scottish rate(s) (Scottish rate of income tax see PAYE100035) when payment is made
  • Write on the Deductions Working Sheet

    • 0T week 1 / month 1 or S0T week 1/month 1 in the amended code space
    • The amount of pay and tax in the week or month in which the payment is made
  • Notify HMRC in cases where packages of over £30,000 are taxable, of the

    • Amount of the termination payment
    • Date it was made
    • Amount of tax deducted

Termination payment is made wholly or partly in kind. For example, a house or car is transferred

The employer is not required to operate PAYE on the non cash element of the payment. The employer is however, required to make a return under Regulation 91 of the PAYE Regulations of termination awards consisting solely of benefits (or cash and benefits) where the figure is estimated to exceed £30,000 and there is a tax charge under Chapter 3 of part 6 of ITEPA.

These returns should be made by 6 July following the end of the tax year in which the termination takes place and sent to

NIC and EO

HM Revenue and Customs

BX9 1BX

for electronic logging. The team will review the returns before forwarding them to the relevant risk areas in Compliance, Large Business Service (LBS) or Personal Tax International (PTI).

Any case of doubt or difficulty regarding the operation of PAYE should be sent to Personal Tax Customer, Product & Process, PAYE Technical, Shipley.