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Taxing restrictive covenant and exit inducement payments

Definitions

Restrictive covenant payments

These are payments made in return for a person agreeing to restrict their ability to perform services, examples include:

  • Payments made to an employee on termination if they agree not to carry on business in competition with their former employer.
  • When an employee enters into a restrictive covenant with a wholly owned company and then sells the shares in that company to their employer.

Exit inducement payments

These are payments made by a prospective employer or contractor to a person to give up a certain status or position, examples include:

  • Payments to employees to entice them to leave their current position.
  • Payments to employees whose job status changes, even if they don't have a career change.

How to tax

These types of payments are classed as source deduction payments, so PAYE must be deducted at the lump sum rate, see Lump sum payments > for more information.