The one fact many people think they know about termination payments is that the first £30,000 is tax free. However, it isn’t any longer.
From 6 April 2018 the tax-free £30,000 cap doesn’t apply in full, as the amount that the person would have been paid if they had worked their full notice period is taxable as earnings. Only the residue of a termination award, after deduction of these taxable amounts, can be covered by the £30,000 tax-free amount.
There is a complicated formula which works out what elements are treated as salary. This takes into account the individual’s basic pay for the last pay period they worked, any contractual pay provided in lieu of notice, and how long the normal pay period and the notice period were.
Any statutory redundancy paid must be deducted from the tax-free capped amount of £30,000. The exemption for periods spent working overseas no longer applies.
We can help you work out the taxable element of any termination payments you need to make to your employees.