SE65875 - Tax treatment of Local Authority officials and employees: redundancy payments

An employee of a Local Authority, River Board, Harbour Board or other similar body who becomes redundant may qualify for compensation under one or more of the Regulations made under Section 259 Local Government Act 1972, Section 24 Superannuation Act 1972, or similar Acts. The names by which the various types of compensation are known, and their treatment for tax purposes, are as follows:

• Re-settlement compensation is chargeable under Section 148 ICTA 1988 (see SE13000) provided that it is not paid for more than 52 weeks. If payments continue beyond this period, refer to Employment Income Technical.
• Long-term compensation in the form of annual periodical payments gives rise to liability under Case III of Schedule D (see McMann v Shaw (48TC330)). In practice the payments are dealt with under PAYE unless the payer or payee objects.
• Retirement compensation and Widow's compensation are chargeable as a pension under the normal rules of Schedule E (see SE74001). Where, however, a lump sum retirement payment represents part commutation of a pension payable under a superannuation scheme, see SE13660.
• Compensation for premature retirement may take the form of either "lump sum compensation" or "annual compensation". The former is chargeable under Section 148 ICTA 1988 (see SE13000) and as regards possible exemption see SE13660. Payments of annual compensation are dealt with as for "Long-term compensation" above.
• Redundancy and reorganisation compensation under the Local Government (Compensation for Redundancy) Regulations 1994 is chargeable under Section 148 ICTA 1988 (see SE13000).