Chapter 26 - Termination Payments Flashcards
What do typical termination payments include?
Compensation for loss of office
redundancy payments
damages for dismissal
PILON
How is a termination payment treated where the employment contract contains a clause under which the employee has a legal right to a termination payment?
The payment will be earnings from the employer & be taxed in full
What does s.401 ITEPA 2003 apply to?
Redundancy payments & non-contractual / ex-gratia payments
Under what circumstances will a payment be fully exempt from tax under s.401?
The payment is made on the death of an employee
The payment is made into a pension scheme
The payment relates to the provision of a counselling or retraining course
How is the first £30k treated under s.401?
Exempt from tax
What NICs is the excess of £30k charged to?
Class 1A
Define statutory redundancy payment
An amount which must be paid by the employer to the employee under employment law - it cannot exceed £21,000
What is the legal minimum notice period?
1 week for every year worked up to a max of 12
How are wages treated when an employer honours a notice period?
The employee will receive 3 months wages, all of which would be earnings taxable in full
How are wages treated during garden leave?
Amounts paid during garden leave are fully taxable as earnings
How are PILONs treated where the contract gives the employer the right to make a PILON?
Automatically earnings - taxable in full
True or false
PENP is eligible for relief under the £30k exemption
False
PENP is treated as earnings
What is the calculation for PENP?
Basic pay x days / period LESS amounts paid on termination taxable as earnings
BP x D / P - T
True or false
Where a payment is made to an employee under contractual obligation, this payment will be regarded as earnings for Class 1 NICs
True
Is PENP treated as earnings for Class 1 NIC?
Yes
Is an ex-gratia payment treated as earnings?
No
True or false
Where a termination payment is not regarded as earnings, the employer will be subject to Class 1A NIC on the amount in excess of £30k
True
How is a car treated in a termination package?
The value of the car at the date of gift is used when determining the benefit on termination
How are restrictive covenant payments treated?
Taxed in full & subject to Class 1 NIC
Where is a termination payment in excess of £30k treated in the tax computation?
After dividends
