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Taxation of termination payments

Damian Kelly and Sarah Cowen from Higgs and Sons discuss a number of issues with the taxation of termination payments.

When an employment relationship terminates, there may be outstanding payments owed to the employee. In some circumstances, the employer may also choose to offer the employee an additional payment in return for the employee waiving their employment law rights under a compromise agreement. Accountants working in the legal sector may be asked to advise their colleagues and clients on the tax status of such payments.

It is important to identify each element of the financial package being offered to the employee and tax it accordingly. A lump sum termination payment that does not identify its individual elements has a greater risk of being taxable in its entirety.