Are severance/compensation packages tax deductible if you lose your job due to a disability?

Hopefully you will be able to speak to your employer to get adaptions and work arounds in place that will enable you to keep your current job, please see Do I have to stop working now that I've lost my sight?

However, there will be occasions where this is not possible and you may be offered a severance or compensation package. Under EIM13610 - Termination payments and benefits guidelines, there is a disability exemption to paying tax and National Insurance on severance or compensation packages.

HMRC look at two tests which are set out in detail under the EIM13630:

  • There must be an identified medical condition that disables or prevents the employee from carrying out the duties of the employment: and
  • The payment must be made on account of that disability and nothing else.

An employer, who thinks the ill health exemption is applicable should apply to HMRC for Non-Statutory Clearance under Statement of Practice 1/1994 (see EIM13790). If they adopt this approach they will need to include medical evidence in their submission to HMRC.

It is very important the correct form of wording is used in the severance/compensation letter you receive from your employer and that the legislation is quoted within the letter.

RNIB's tax advice service can offer further support and advice, you can contact them via the RNIB Helpline.

You can also find further information on the website:

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