HMRC ends time apportionment for post-termination benefits

HMRC has rewritten its Employment Income Manual on benefits that continue after employment endsGOV. Until 5 April 2027, benefits straddling termination may be apportioned on a time basis as a matter of practiceGOV, with the post-termination slice taxed under section 401 of the Income Tax (Earnings and Pensions) Act 2003. From 6 April 2027 that practice endsGOV: employers must ask whether entitlement to the benefit arose during the employment or from the termination settlement agreementGOV, and tax the post-termination period accordinglyGOV. Living-accommodation time-apportionment guidance is removed on the same date, while the EIM13905 and EIM13906 examples are retained and updated for the new test.

Where the agreement to provide the benefit beyond termination arose during the employment, the benefits code continues to apply after termination.GOV Where a specific agreement to provide the benefit beyond termination forms part of the settlement agreement, section 401 applies from termination.GOV Section 401 only taxes payments and benefits received in connection with termination, change of duties or change of earnings that are not otherwise chargeable, with a £30,000 threshold shared across the termination package and post-employment notice pay treated as earnings.

Car availability illustrates the split. An ex-employee who keeps a company car without transfer takes a car-benefit charge reduced to cessation at step 7 of section 121(1), with fuel scale charge reduced likewise, plus a separate additional charge for continuing availability calculated under the termination rules. In the manual medical-insurance example, £500 monthly cover for nine months before a 5 January 2023 termination is charged under the benefits code at £4,500, while three months after termination provided under the settlement is charged under section 401 at £1,500, wholly taxable because the £30,000 threshold is absorbed by a £35,000 cash payment. In the car example, a 5 July 2023 termination with two years continued private use uses the same cash-equivalent percentage before and after, with time slices of 275/366 before and 91/366 after, leaving £839 in the benefits code and a £2,536 post-termination amount absorbed by the threshold alongside a £25,000 cash sum, so the section 401 charge is nil and £2,464 of threshold is carried forward.

Excluded employments need care: a benefit untaxed during employment for that reason can become taxable for the first time after termination where the post-termination provision comes from the settlement agreement. Employers report post-termination benefits under PAYE74015 and former employees return the value on self-assessment. Practitioners should map each package element to its legal source now, amend settlement templates to state whether continued benefits extend an employment entitlement or create a new termination award, and diary the April 2027 switch for payroll and P11D processes. The legal basis is the Income Tax (Earnings and Pensions) Act 2003, Part 3 and Chapter 3 of Part 6 including sections 62, 121 and 401 to 403, as explained in the updated Employment Income Manual pages on termination payments and car benefits.