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A cash payment received on termination may be taxable depending on the nature of the payment and any available reliefs. To understand whether a cash payment is subject to income tax, see the How could a termination payment be taxed? guidance note.

The termination package may be made up of arrears of salary, bonuses and other sums which the employee is entitled to from the employment or a compensatory sum and other sums only paid because of the termination. Some cash payments may be exempt from tax, see the Non-taxable termination payments guidance note. The references below to termination payments refer to all these payments unless stated otherwise.

Any cash payment of contractual remuneration is to be treated as earnings and taxed through the PAYE system. The payment may also be subject to Class 1 NIC. The collection of income tax and NIC is governed by different rules and also different depending on when the payment is made. For more on the basics of NIC, see the Overview