Termination Payments – Situations in which the £30,000 exemption appliesFriday, March 19th, 2010
On 14 January 2010, in the case Colquhoun v Revenue & Customs, the First Tier Tax Tribunal ruled that Mr. Colquhoun was entitled to have his termination payments reduced by the £30,000 tax exemption.
Section 403 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA) provides a tax exemption for the first £30,000 of payments and benefits made in respect of three situations, namely
- termination of employment,
- a change of employment duties, or
- a change in employment earnings.
Section 404 of ITEPA allows the £30,000 exemption to be used only once in the same employment or associated employments.
In 1997, Mr. Colquhoun received a buy-out payment in return for the phasing out of a very generous redundancy scheme. Under that arrangement, he received a payment of £31,000, the first £30,000 of which was not taxed as it was, at the time, deemed to qualify for the £30,000 exemption.
In 2005, when Mr. Colquhoun’s employment was terminated on the grounds of redundancy, the employer did not reduce the £91,594 termination payment by £30,000 for tax purposes but taxed the full amount. However, Mr. Colquhoun believed he was entitled to the £30,000 exemption so claimed a deduction of that amount on his self-assessment Return. HMRC subsequently refused to allow the deduction and Mr. Colquhoun appealed.
The Tribunal decided that the buy-out payment in 1997 did not fall into one of the three permitted situations in which the £30,000 could be used and that, as a result, the £30,000 was still available to be used against Mr. Colquhoun’s termination payments in 2005.
The Tribunal did not comment on the tax status of the 1997 payment and, in any event, it is too late for HMRC to seek to tax that payment retrospectively.
The section 403 tax exemption is most commonly used against payments and benefits resulting from the termination of employment. As mentioned above, it may also be used against payments that are made in respect of changes made to an employee’s contractual duties or earnings. The Tribunal was clear, however, that a payment made to buy out a contractual entitlement does not fall within any of the permitted circumstances.
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