Foreign service exemption for termination payments

Produced by a Tolley Personal Tax expert

Personal Tax

Guidance

STOP PRESS: The remittance basis is abolished from 6 April 2025, although this only applies to foreign income and gains arising on or after that date. The remittance basis rules still apply to unremitted income and gains arising before that date but remitted later. The legislation is included in FA 2025. For more details, see the Abolition of the remittance basis from 2025/26 guidance note.

Introduction

An exemption from tax can apply to termination payments where the employee worked all or part of the employment period overseas (which the legislation terms ‘foreign service’, see the definition below).

Where an employee has worked overseas and that employee receives a termination payment that falls within ITEPA 2003, ss 401–416, the termination payment may be:

•
fully exempt from UK tax, or
•
partially exempt from UK tax

It is a common mistake for employers and advisers to assume that a termination payment from a UK employment is not taxable on the employee if it is received whilst the employee is not UK resident. This

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