HMRC is raising awareness of the rules surrounding tax on termination payments.
The tax authority's latest agent update stresses that employers should be careful when finalising severance packages to ensure they stay compliant with legislation changes.
The Government has made several reforms to these rules in the last five years. These include the introduction of post-employment notice pay in 2018, which ensures that non-contractional payments are subject to income tax and National Insurance contributions.
Sometimes, the employee's notice period will not be a whole number of months. In this case, the employer can use an alternative method for calculating severance payments.
Furthermore, HMRC reminded employers that foreign service relief on termination payments to UK resident individuals is no longer available. Employers should also be aware that the exemption for injury does not include emotional injury.
Employers will need to identify what the payment is for to determine the right tax treatment.
Depending on the circumstances, a termination payment may consist of payments including redundancy, holiday pay, compensation for loss of office or payment in lieu of notice.
Further guidance on how each of these benefits is taxed can be found in HMRC's employment income manual.
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