A restraint of trade payment is money paid to a person for agreeing to limit their future work - typically not to compete with the employer or join a rival for a set period. The payment is the price of that restriction.
What it means
Although it is not pay for work done, a restraint payment to an employee or former employee is treated as remuneration and taxed in full. The rules were tightened specifically to close a gap where such payments were once argued to be capital and untaxed. There is no tax-free portion.
Where it fits in
A restraint payment is an earnings component in the period it is paid, included in remuneration for PAYE. Because the amounts are often large and once-off, a directive may govern the tax, and it is reported under the relevant IRP5 source code.
Key rules
- Payment for agreeing not to compete or to restrict future work.
- Fully taxable as remuneration, with no tax-free portion.
- May fall under a directive given the size of the amount.
- Reported under the prescribed IRP5 source code.
