Taxation of Termination Payments


From 6th April important changes are coming into effect regarding the treatment of certain termination payments for tax purposes.

After this date any payment made to an Employee in lieu of notice will be treated as earnings and be subject to deductions for income tax and national insurance.  This will apply in any situation where an employee receives a payment in respect of either contractual or statutory notice – rather than working their notice in full.  This will also apply where an employee receives a payment in respect of notice via a settlement agreement. 

In certain circumstances additional payments unrelated to notice, for example compensation for loss of office or injury to feelings, may still be made tax free.  Redundancy payments up to £30,000.00 will remain free from any deductions. Payments relating to accrued annual leave due to an Employee and paid as a lump sum upon termination will be subject to deductions.

Any payment relating to a termination which takes place after 6th April will need to comply with the new provisions.

These revised arrangements end the current practice whereby in certain situations notice payments can be made on a tax free basis.

The treatment of termination payments for taxation purposes can be a complex area – please seek guidance from your payroll provider about any specific circumstances which may arise. Should you be entering into a settlement agreement with an Employee the school’s SPS Consultant and Legal Advisor will also be able to provide guidance on your obligations with regards to taxation.