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.
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 questions about this EPN or would like to receive EPNs in a different format, email: EPN@MyCSP.co.uk
Electronic copies of the Employer Pension Guide, current EPNs, and forms are in the Employer section of the Civil Service Pensions website.
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.
