Tax Treatment of Termination Payments - A Short Guide 2010


When an employment contract is terminated, eligible employees will be entitled to a payment on termination.

Both income tax and national insurance contributions (NICs) will have to be considered when a severance payment is made. The employer and former employee will want to be sure that the termination payment is legitimately structured to reduce the tax liability. They also want to be certain that no future tax liability or penalties for non-payment of tax and NICs will arise.

As different tax treatment will apply according to the type of payment, it is important to distinguish between termination payments which arise under a contract of employment and those which do not.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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