Effect of severance payment on adjusted net income

The taxpayer reached a termination agreement with her employer in April 2016 because her ill health prevented her carrying out her role. Under the agreement the employer paid her severance as ‘compensation for loss of office and termination’.

In 2019 HMRC raised a discovery assessment on the basis that the taxpayer was liable to the high income child benefit charge (HICBC) for 2016-17 because during that year her adjusted net income was more than £50 000. It considered that none of the payment was within the disability exemption in ITEPA 2003 s 406(1)(b).

The officer referred to the two tests established in Hasted v Horner 67 TC 439. The first was that there had to be a medical condition that prevented the employee carrying out the duties of their employment. This was clearly satisfied. But the second test was that the payment had to be made on account...