Are lump sum receipts taxable?
Payments on termination of employment
Payments on termination of employment may be entirely exempt or partially exempt.
1) Payments on account of injury, disability or accidental death.
2) Lump sum payments from approved pension schemes.
Partially exempt payments
On the loss of office, and individual is entitled to £30,000 statutory redundancy pay.
Any amount given above this will be taxable. This can be known as non-statutory pay/compensation for loss of office/ex gratia payments.
Whatever it is called, any amount above £30,000 is taxable as employment income.
Payments in lieu of notice
These are payments made when an individual is asked to leave office immediately, without giving them the proper notice period.
These payments are taxable as employment income in the year of receipt regardless of whether or not they are included in the employment contract.
John was given a £22,000 statutory redundancy payment.
He was also given £48,000 ex gratia.
His annual salary was £120,000 and he received 3 months salary as payment in lieu of notice.
What are the tax implications of these payments?
Statutory redundancy = exempt (but uses up some of the £30,000 exempt amount)
Taxable ex gratia payment:
£48,000 - (£30,000 - £22,000) = £40,000 taxable as the top slice of income
Payment in lieu of notice:
3/12*£120,000 = £30,000 taxable as employment income
Lump sum pension receipts
When lump sum pension receipts are received by an individual, the entire receipt is not taxable, subject to a total tax free lump sum amount of 25% of the fund value.
The lump sum amount is limited to 25% of the lifetime allowance limit of £1,030,000 for 2018/19.