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Taxation of Termination Payments

Continuing our series of basic informative articles Jeremy Edwards and Laura Foster of Baker & McKenzie LLP's Employee Benefits Group look at the tax treatment of termination payments
Employers may make payments to employees upon the termination of their employment for many different reasons. Such reasons could include payments made in compensation for breach of the employment contract or discrimination damages for wrongful dismissal ex gratia payments or a payment in lieu of notice (PILON). The tax treatment of these severance payments varies depending on the underlying reasons for the payment. When considering the appropriate tax treatment for a termination payment both income tax and National Insurance contributions must be considered. The tax treatment of specific types of termination payment are considered later in this article.

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