PAYE operation: lump sum termination payments: how employers operate PAYE on termination payments
You should check the other guidance available on GOV.UK from HMRC as Brexit updates to those pages are being prioritised before manuals.
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/COT on a week 1 / month 1 basis (Scottish tax see PAYE100035 or Welsh tax see PAYE100040) when payment is made
Write on the Deductions Working Sheet
- 0T week 1 / month 1 or S0T/C0T 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
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 IPD Technical (Earnings).