The tax law relating to employment income is contained in the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003).
Employment income consists of general earnings and specific employment income. An ‘employment’ in this context includes any employment under a contract of services as well as apprenticeships and services for the Crown. Employments also cover ‘office holders’ such as directors.
The distinction between general earnings and specific employment income is important for people who are not resident, or not ordinarily resident, or not domiciled in the United Kingdom for tax purposes. There are special tax rules which apply to general earnings but do not apply to specific employment income.
For tax purposes, general earnings means payments made to the employee as a reward for services rendered. It consists of remuneration paid in normal monetary form (cash) as well as certain non-monetary rewards such as taxable benefits.
Specific employment income includes payments and benefits on termination of employment, payments and benefits in respect of non-approved pension schemes and share related income (share options).
For a payment to be treated as being from employment it must be made in return for services (past, present or future). There is a significant body of case law to determine the existence of an emolument of an employment.
In Hamblett v Godfrey (1987) the courts disagreed that the compensation paid by the employer to the employee for agreeing to give up her rights to join a trade union was not an emolument. It was decided that the right to join a trade union was part of being an employee and it was closely linked to the employer-employee relationship so it has to be treated as an emolument.
Another interesting case is Shilton v Wilmshurst (1991) where the footballer Peter Shilton was transferred from one football club to another. The ‘old employer’ paid Mr Shilton to agree the transfer. The courts decided that the income was an inducement to remain or become an employee and it was not a termination payment (payment being tax free up to £30,000), so the full amount was taxable.