EIM13955 - Termination payments and benefits: example: Section 401 ITEPA 2003: £30,000 threshold: order of set-off: receipts on or after 6 April 1998

Section 404(5) ITEPA 2003

A termination settlement provides for:

• £36,000 paid in 3 equal annual instalments from 1 January 2004 plus
• use of a car. The cash equivalent of this benefit is calculated (see EIM13270) as £2,000 for 2003/04, £7,000 for 2004/05 and £7,250 for 2005/06.

The total is £52,250 (£36,000 + £2,000 + £7,000 + £7,250), against which only one £30,000 threshold is available. Following EIM13520:

• for 2003/04, the total provision for tax purposes is £14,000 (£12,000 cash plus £2,000 benefit cash equivalent). This is all covered by £14,000 of the threshold, leaving £16,000 balance of threshold to carry forward.
• for 2004/05, the total provision for tax purposes is £19,000 (£12,000 cash plus £7,000 benefit cash equivalent). This is more than the available threshold of £16,000 so the latter must be set off in the order explained in EIM13520. So it is first set off against the payment of £12,000 made on 1 January 2005, leaving £4,000. That £4,000 is then set off against the total cash equivalents at 5 April 2005 of £7,000. So £3,000 is charged to tax.
• for 2005/06, there is no threshold brought forward so the £12,000 cash payment and the £7,250 benefit cash equivalent are chargeable in full under Section 401 ITEPA 2003.