Tax Treatment of Compensation Payments on Termination of Employment

Advanced personal taxation

TABLE OF CONTENTS
SECTION B...............................................................................................................................3
Part 1......................................................................................................................................3
Part 2......................................................................................................................................5
REFERENCES...........................................................................................................................8

SECTION B
Part 1
INTRODUCTION
On the termination of employment, the employees most of the time receives the
compensation package which is mainly composed of the various elements. During the
process of considering the tax treatment of this package, it is very essential for determining
the what is exactly being paid to the workers through the way of taking into account each of
these packages separately. There are number of ways of getting the employment terminated
and this results into compensating the employees which might differs based upon the terms of
employment contract, the way and the cause behind the termination along with the bargaining
power of the parties. The taxation treatment is also based upon the how the worker is being
dismissed and the type of right the compensation is replacing.
MAIN BODY
The tax treatment of the compensation payment is dependent upon the character of
the compensation. As per the replacement principle, the compensation which is being
received on termination in substitute for another account which take the character of the
amount received as stated in the case law of FCT v Dixon (1952) 86 CLR 540. Therefore, a
compensation payment being paid in lumpsum will be considered income in nature n case it
is received as a replacement.
In respect to the termination package, it is essential to bear in mind that such
payments are subject to tax as earning except when it comes under the category of exempt
payment. Therefore, any payment which is being given in the employment contract would be
taxable to full and along with that would be subject to national insurance contribution
(Cunha, 2017). Thus, the sums which are given in the termination document as payment in
terms of compensation for loss of office are subjected to tax in full considered them as
earnings. The first payment which is being made in association to the termination is tax free
amounting to £30,000 as long s it is not considered taxable as earnings. Any amount in excess
to £30,000 will be taxable as normal. The taxable treatment of the payments which is paid as
a compensation pertaining to the discrimination will based upon the nature of payment as soe
may fall into £30,000 exemption limit while some may complete tax free.
Taxation of the benefits received by the employee are stated below:
Gardening leave: Under this, the employee is put on gardening leave in which the employee
is provided with the proper notice pertaining to the employment termination but is in fact not