Way out of the maze

KEY POINTS

• Complex tax treatment of termination payments.
• Application of ITEPA 2003 s 62.
• Breach of contract.
• Importance of timing.
• Awards for personal injury and defamation.

The dilemma faced by an employee on the termination of employment is complicated by the different tax treatments that can be applied to the various components of his compensation package.

HMRC’s statement of practice SP1/94 makes clear that all constituent parts of a termination agreement have to be considered separately for income tax and National Insurance.

The many permutations that can arise in structuring a compromise agreement often create a tax maze for the parties concerned and their advisers.

A guide out of this maze is to hold on to the fact that broadly there are three ways that any of the components can be treated for...