Sort out tax matters when an employee leaves

Lump sum and non-cash payments

Tax-free payments

Lump sum payments made when an employee retires or dies may be tax-free. Contact the HM Revenue & Customs Audit and Pension Scheme Services Enquiry Line on Tel 0115 974 1600 for advice.

Certain payments from overseas retirement benefit schemes may be tax free. Ask your HM Revenue & Customs office about Extra-Statutory Concession A10 or download the guide on Extra-Statutory Concessions from the HM Revenue & Customs website (PDF), which gives further information on lump sums paid under overseas pension schemes.

You may also be able to claim additional income tax relief if someone lived and worked abroad whilst employed by you.

When an employee dies

If an employee dies - and you pay any outstanding earnings to their personal representative - deduct tax under PAYE (Pay As You Earn) using the same tax code you were using before their death. Record details of any such payments on the employee's form P11. No National Insurance contributions (NICs) are due on earnings paid after an employee dies.

If any payments are made in a later tax year to the one in which the employee died, deduct tax under PAYE using code BR and record details on a new form P11 in their name. Download a specimen of form P11 from the HM Revenue & Customs website (PDF).

Non-cash payments

It's not unusual for employees to receive a payment other than cash when they leave. HM Revenue & Customs defines this as a readily convertible asset.

For more guidance on different types of non-payment and how to deal with them, download the employers guide to PAYE and NICs from the HM Revenue & Customs website (PDF). This guide also provides more information on lump sum payments.

You can also download a guidance leaflet on valuing shares from the HM Revenue & Customs website (PDF) for advice on some non-cash payments.

Subjects covered in this guide

• Introduction
• What forms you need to fill in
• Standard payments
• Statutory Maternity, Paternity and Adoption Pay
• Taking account of student loan repayments
• Redundancy payments
• Employment tribunal awards
• Lump sum and non-cash payments

 

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