What are golden handshakes?

Golden handshakes are payments to an individual upon termination of employment and may also be known as lump sum payments.

There are cases where such payments are not taxed at all, which are those post-death when an employee has died in service, and in some cases payments due to disability may qualify for exemption. Those are outside the norm.

For the most part termination payments are taxable under special rules. The first £30,000 of a leaving payment will be exempt from tax if it is an ex-gratia payment and therefore non-contractual. One may have to make the case to HMRC that the payment is not for services rendered and that there was no obligation on behalf of the employer.

Otherwise, payments in lieu of notice (PILONs- how we love these acronyms) are taxable if contractual in the sense that the employee’s contract specifies that the employer will make a PILON if the employee is asked not to work notice.

If the contract does not specify this, being silent on the position where the employee is asked to leave without working notice, then the first £30,000 may qualify for the tax exemption because it then represents “damages” for breach of contract. However, if the employer habitually follows the practice of paying terminated employees in lieu of notice even though the contract does not specify this then HMRC may take the view that the first £30,000 is taxable because an employee would have the expectation and the employer probably the intention from the outset.

A true redundancy payment should qualify for the £30,000 exemption, but must be supportable as genuine on the evidence available.

If you are starting to think this whole area of leaving payments is a minefield, you would be right. If you are an employer planning on letting some of your workers go, you should get professional advice.

If you are an employee on the receiving end of both your notice and a proposed payment, you would also be wise to get professional advice before the agreement, and also in completing your Self Assessment Tax Return later. The level of taxation on any non-exempt amount might also depend on what level of income you have in the year you receive your payment, and often if you are not seeking further work you will benefit by having your termination payment at the beginning of a tax year in April or May so that it will not be aggregated with a whole year’s pay.

The golden rule for golden handshakes is to seek professional advice.

© Jon Stow 2010

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2 Responses to “What are golden handshakes?”

  1. Stephen Jones said:

    Aug 09, 10 at 12:56 pm

    I have recently been TUPE transfered on 1st APRIL 2010 following the company being purchased by MITIE.
    Our division was TUPE transfered from the company purchased which fell under the management of another section within MITIE to their Engineering section.
    MITIE have just notified all in our division that they are closing us down and we are all in redundancy consultation process at present. There is no mention of the PILON arangement in my service agreement, but I expect to be allowed to leave immediately rather than work my 6 months notice.
    As MITIE are a new employer and I a new employee to them by approx 4 months, therefore being no expectation one way or the other, would I qualify for a golden handshake as part of my leaving package.
    I have 15 years service in the TUPE transfered company my age is 55 and a director of the TUPE company.

  2. jon said:

    Aug 10, 10 at 12:33 pm

    Stephen, my article is about the tax treatment. Whatever payment you might receive is governed partly by your contract and of course your employer would have discretion as regards any additional payment. Strictly this is an HR issue rather than a tax matter and I am not qualified to comment.

    In my experience often an employer will help with paying fees so that the employee can get independent legal advice, but I would suggest you book time with an employment solicitor either way if you are unhappy about any deal being offered.

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