Lump sum receipts 2 / 3

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, an 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 for the employee, and the employer will pay Class 1 A NIC on the excess.

  • Payments in lieu of notice (PILON)

    These are payments made when an individual is asked to leave office immediately, without giving them the proper notice period. 

    If these payments are contractual, then the employee will pay income tax on them, and Class 1 NIC will be payable on them by both the employee and employer.

    If these payments are non contractual and it is not custom to give such payments by the employer, then any amount paid as a PILON that would have normally been paid to work during the notice period will be subject to income tax (employee) and Class 1 NIC (employee and employer)

    Any additional amount given can be qualifying expenditure and if it falls within the £30,000 - they will be tax free, but any excess will be subject to income tax (employee) and Class 1 A NIC (employer).

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, as part of his contract of employment.

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. This will be subject to income tax (employee) and Class 1 A NIC (employer)

    Payment in lieu of notice:
    3/12*£120,000 = £30,000 taxable as employment income. This will be subject to income tax (employee) and Class 1 NIC (employee and employer).

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 £1,073,100 for 2023/24.