Leaving any role can be difficult but on some occasions a termination payment – paid in the event of dismissal, redundancy or retirement – can help ease the financial impact of a change in circumstances. Until this year if you had worked overseas for a set amount of time this payment could be enjoyed free from UK tax – even if you had already returned home. New legislation, which came into force from 6 April 2018, has now removed this tax break – known as foreign service relief.
From now on any termination payment from an overseas employer – paid in the same year that you return to the UK – will now be taxed in the UK if you are UK tax resident at any point that year.
Thankfully there are still options to reduce or eliminate the tax. The notable exception is if the termination payment is paid whilst you are tax resident in another country with which the UK has a suitable double taxation agreement. As ever, the devil is in the detail but we can advise in relation to your personal circumstances.
Do note that the withdrawal of this relief applies just to termination payments, and generally covers compensation for loss of office, salary or wages paid in lieu of notice, damages for breach of contract and redundancy. Other payments, such as a bonus or payment in lieu of notice that is included in the employment contract, will not be caught by this rule change and will be taxed in accordance with existing principles.
If you are set to receive any form of termination payment do contact us to enable a proper review and a determination of the extent of any UK tax liability.