Taxing restrictive covenant and exit inducement payments
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.