Audience
Pension leads
HR managers
Payroll managers
Finance managers
Summary
This guidance sets out how departments should apply the correct tax treatment to efficiency compensation payments made to employees upon dismissal.
Timing
Immediate.
Detail
This EPN should be used alongside EPN 584 and EPN 471, which you can access on the national archive website.
Departments are responsible for applying correct tax treatment to efficiency compensation when an employee is dismissed.
Annex A provides detailed guidance on how efficiency compensation payments are correctly taxed, for employees leaving under Dismissal on grounds of efficiency.
Departments must determine and apply the right tax treatment at the time of payment, using advice from the Centre of Tax Excellence.
The first £30,000 of efficiency compensation is usually tax-free according to Section 403 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003).
Any amount exceeding £30,000 is subject to income tax and Class 1A (employer’s) National Insurance contributions
Payments related to injury or disability may be fully tax-exempt under Section 406 of ITEPA 2003.
Departments must assess the nature of each case, especially regarding whether the dismissal stems from a disability/injury, to determine if the exemption under Section 406 applies.
Departments must clearly distinguish efficiency compensation from other payments like redundancy or ex-gratia payments.
Where there is uncertainty on s406 ITEPA, departments should use HMRC’s Non-Statutory Clearance Service with the employee’s consent. Departments may also seek support from the Tax Centre of Excellence.
Updated internal payroll processes and stakeholder co-ordination are essential to ensure compliance and consistency across government.
Contacts
If you have a question about the distribution of EPNs or you need to receive them in a different format, please contact us.
You can find all current EPNs and forms on our website www.civilservicepensionscheme.org.uk under ‘Employers’.
Historic EPNs
All EPNs prior to EPN635 have been archived. You can find these on the national archive website. You will need to scroll down to the EPN section to find the archived notices.
Note: This notice is for employers. Please do not share it with scheme members.
Members can find information about their pension on the scheme website.
