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Section 402D ITEPA 2003

With effect from 6 April 2018, some termination payments and benefits are chargeable to income tax as general earnings and do not benefit from the £30,000 threshold available in section 403 ITEPA 2003.

EIM13874 defines the term ‘relevant termination awards� and explains that relevant termination awards are split into 2 elements:

• post-employment notice pay (PENP) (see EIM13876)
• relevant termination awards subject to section 403 ITEPA 2003 (see EIM13878)

Post-employment notice pay is calculated using the PENP formula, set out in section 402D ITEPA 2003. The PENP formula is:

((BP × D) ÷ P) � T

‘BP� is the employee’s basic pay in respect of the last pay period of the employment ending before the trigger date (see EIM13882).

‘D� is the number of calendar days in the post-employment notice period (see EIM13890).

‘P� is the number of calendar days in the employee’s last pay period (see EIM13886).

‘T� is any payment, or benefit received in connection with the termination of a person’s employment, which is chargeable to income tax apart from in Chapter 3 Part 6 of ITEPA 2003. There are some important exceptions to what is included within the amount of ‘T�. (see EIM13896).

If the amount given by the formula is negative then take the amount of post-employment notice pay to be nil.

If the amount given by the formula exceeds the total amount of the relevant termination awards then post-employment notice pay is capped at the total amount of the relevant termination awards.

For a worked example of this formula, see EIM14000.