Tax Tip of the Month
June 2010
With a 50% income tax rate now upon us, anything which enables you to receive tax-exempt income has got to be a Good Thing. One of these types of exempt income is the so-called golden handshake. If you are being made redundant from a job, or leaving for whatever reason, a payment made to you to compensate you for the loss of your employment is tax-exempt up to £30,000.
Do note the carefully worded sentence we have just used, though. You don’t get the £30,000 exemption if the payment is due to you under the contract, for example if your contract provides that you’ll be paid on termination, or if it represents arrears of things like overtime and holiday pay. It has to be specifically compensation for your loss of the employment.
The £30,000 golden handshake exemption is reasonably well known. There are two other potentially very valuable reliefs indeed, however, that are much less well known.
One is where you retire from your job because of injury or disability. Interestingly, the termination payment in these circumstances is completely tax-free, that is there is no £30,000 ceiling. Also, ‘disability’ can mean not just physical disability but also mental disability. There is no reason at all in principle why a person who leaves a job because of stress, which is so bad that they are unable to continue in that job, should not receive an unlimited payout tax-free.
Remember, also, that there is no specific rule saying that this exemption doesn’t apply to shareholder/directors leaving the employment of their own companies.
The other area in which exemption can apply is where the employee’s service has included service abroad. The corresponding proportion of any termination payment is excluded from tax as well.
