Employment termination payments

The courts have recently considered a case involving the familiar territory of the payment of £30,000 on termination of employment. The court had to consider the status of these payments in the case. When someone leaves their job, they may get a 'termination payment' from their employer. This may be payable if the employee is:

• made redundant
• dismissed
• chooses to leave their job.

The termination payment could include:

• statutory redundancy pay
• holiday pay
• unpaid wages
• company benefits, for example bonuses or enhanced redundancy
• any payments received instead of working during the notice period, for example payment in lieu of notice.

The employer is responsible for making sure that the termination payment is taxed correctly. The employee does not usually pay tax on the first combined £30,000 of:

• statutory redundancy pay
• additional severance or enhanced redundancy payments provided by the employer
• non-cash benefits, for example company property retained after the employment ends.

The employee will pay tax on any amount over a combined total of £30,000. The employer will pay employer Class 1A National insurance on any amount over a combined total of £30,000. It is thus essential to establish the nature of the £30,000 payment.

In the recent case, the status of such payments made to company directors was considered. HMRC argued that the payments were 'earnings' and were thus taxable; the directors argued that they were exempt.

The directors did not have a contract of employment or service contract with the company and they wanted to resign. One of the companies involved paid £30,000 to each director on their resignation which was described as 'compensation for loss of office'. There was no written termination agreement or similar document.

None of the directors declared the payment on their self-assessment tax return, one arguing that this was because they believed it was tax free. The directors did not take any advice as to whether or not the payments were taxable. The court found that a 'reasonable taxpayer' would have taken some advice about the tax treatment of the payments, even if they thought they were tax free, in order to check that was the case and held that the payments were 'earnings' and were this subject to income tax and National Insurance contributions.

This case is a salutary reminder to take employment and tax advice on termination payments.

To discuss this or any other employment matter, contact us.