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Introduction to this document

Termination payment letter

You need to take account of both the legal and tax issues when drafting documentation for dealing with a termination payment. But if you don’t have any employment issues with the departing employee it’s arguable that the payment can be made tax free (subject to the £30,000 tax-free limit). Use this document to improve your chances of HMRC agreeing with you.

The tax-free letter

The major downside to having a Pay in Lieu of Notice (PILON) Clause, is that the payment is then taxable as it’s a payment of earnings made under the contract of employment. Without a PILON clause, it’s arguable that the payment is tax free (subject to the £30,000 tax-free limit) as compensation for loss of employment. If you don’t have any employment issues with the departing employee you should enclose a Termination Payment Letter with the payment to the employee. This should explain that you have not made a payment in lieu of notice but have breached the employee’s contract. It is therefore seen as damages for the breach. Further evidence that a termination payment is tax free.