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An ex gratia payment or payment for loss of office made by an employer to an employee if the contract of employment is terminated; for example, in the case of a takeover. It is possible, under certain circumstances, for the compensation payment to be paid wholly or partly tax-free. The payment must not be made as a result of a contractual obligation to make such a payment nor should the employee be entitled to the payment. If it can be shown that the payment complies with the regulations then the first £30,000 is tax-free, with only the balance chargeable to tax.

Subjects: Accounting.

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