EIM13610 - Termination payments and benefits: Section 401 ITEPA 2003: exceptions: payments on account of injury or disability: general

Section 406(b) ITEPA 2003

A termination (or change) payment is excepted from tax under Section 401 ITEPA 2003 if it is paid on account of:

• an injury to the holder of an office or employment, or
• the disability of such a person (see EIM13620).

This usually means that the injury or disability causes the termination (or change in duties or earnings) and the payment is made on account of the injury or disability (see EIM13630).

Exceptionally, the injury or disability may not lead to termination but the exception is still due. For example, an employee cannot work for 6 months due to illness. Treatment is successful. There is no break in employment. Some months later the employee leaves to take up another job for no other reason than more money. When the employee leaves, the employer makes an ex-gratia payment. Provided that the payment is made on account of the disability and for no other reason, the exception will be due.

“Injury” is construed as either physical or psychological injury. This may include injury to feelings where the injury amounts to a recognised psychological illness.

Note: if the employment continues, liability under the benefits code (see EIM21006) must be considered before Section 401 ITEPA 2003.