ATXP6 UK
Syllabus A1. Income tax A1c. Income from employment

A1cii. Lump sum receipts

Syllabus A1cii)

Advise on the tax treatment of lump sum receipts

Are lump sum receipts taxable?

Payments on termination of employment

Payments on termination of employment may be entirely exempt or partially exempt.

  • Exempt payments

    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.

Illustration

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?

  • Solution

    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.