If an employment contract is terminated after 5 April 2018, the £30,000 tax-free cap on a payoff does not necessarily apply in full. Any payment made on termination of the employment needs to be broken down into its elements to test which parts may be covered by the tax-free amount.
Any pay treated as employment income is taxable and only the residue of a termination award can be covered by the tax-free amount. There is a complicated formula which works out what is treated as employment income. This takes into account the individual’s basic pay for their last pay period, any contractual pay in lieu of notice and how long their normal pay period and notice period were.
Any statutory redundancy payment received must be deducted from the tax-free capped amount. The previous exemption for periods spent working overseas no longer applies.
We can help you calculate the taxable element of any termination payments you need to make.