Taxation of payments for restrictive covenants

Produced by Tolley in association with

Employment Tax

Guidance

Restrictive covenants

These are undertakings given by employees during employment or on termination which restrict their conduct or activities. There is a specific charging provision which ensures that payments for restrictive covenants made in connection with current, future or past employments or offices are taxable as earnings.

PAYE treatment

ITEPA 2003, s 225 taxes payments made to an individual for entering into restrictive covenants. In order for consideration to be brought into charge by ITEPA 2003, s 225, the following conditions must be satisfied by the individual:

•
a restrictive undertaking is given in connection with a current, future or past office or employment
•
the undertaking must restrict conduct or activities. It may be absolute or qualified and need not be legally binding.
•
a payment is made in respect of the giving of the undertaking or its partial or total fulfilment. It does not matter to whom the payment is made.
•
the sum would not otherwise be treated as general earnings
•
any earnings

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Sue El Hachmi

Senior Associate at Osborne Clarke

Sue advises on the design and implementation of employee incentive arrangements for private and public companies, including all types of tax-advantaged plans and bespoke arrangements for senior executives and management. Sue also advises on the incentive-related aspects of corporate transactions and has experience of private equity transactions and public company takeovers, flotations and demergers. Sue is a member of the Share Plan Lawyers Group and a member of the UK BioIndustry Association Finance and Tax Advisory Committee.

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