Last updated: 16 October 2026
The question
One of my employees died suddenly and I want to make a lump-sum payment to his family. Will this be tax deductible for my company, and will the family be taxed on it?
Is the payment taxable for the family?
A lump sum paid because of the death of a serving employee is generally tax-free for the recipients. The tax rules on termination payments specifically exclude payments made on the death of an employee, so the £30,000 threshold does not even come into play. The payment is not earnings of the deceased, as it was not paid for his work.
Final pay is different
Pay the employee had already earned before death is treated differently:
| Payment | Tax treatment |
| Salary owed up to the date of death | Taxable; process through payroll with a leaving date |
| Holiday pay owed | Taxable through payroll |
| Ex gratia lump sum because of the death | Generally tax-free for the family |
| Death-in-service benefit from a group life or registered pension scheme | Usually tax-free, paid by the insurer or scheme |
Final pay after death should be paid using code 0T on a non-cumulative basis, and the final FPS should show the date of death as the leaving date.
Is the payment deductible for the company?
A payment is deductible if it is made wholly and exclusively for the purposes of the trade. HMRC usually accepts that reasonable payments to the family of an ordinary employee are made for business reasons, such as staff welfare and morale. Where the employee was also a director-shareholder or a relative of the owners, HMRC may argue the payment was made for personal reasons, and the deduction could be refused. Keep a board minute explaining the commercial reasons.
Example
A small engineering company pays £10,000 to the widow of a long-serving technician who died suddenly. The family pays no tax on the £10,000. The company deducts it as a staff cost, saving up to £2,500 in corporation tax. His final salary of £1,800, owed for the days he worked that month, goes through payroll as normal.
Planning ahead: death-in-service cover
Many employers arrange group life assurance or individual relevant life policies. Premiums are usually deductible for the company and are not a taxable benefit for the employee. The payout goes to the family tax-free and usually falls outside the employee’s estate for inheritance tax if written in trust.
Inheritance tax
A discretionary lump sum paid by the employer directly to the family is generally not part of the deceased’s estate. Salary owed at death is part of the estate.
Practical steps
- Confirm who the payment should go to, ideally after speaking to the family or executors.
2. Record the reasons in a board minute.
3. Process final salary and holiday pay through payroll.
4. Check any pension or life cover that applies.
Frequently asked questions
Do we need to report the lump sum to HMRC?
Not as earnings, as long as it is genuinely because of the death and not owed under the contract.
Is National Insurance due on the lump sum?
No, if it is not earnings.
Can we pay the employee’s funeral costs?
Yes, and this is usually treated in the same way as a death payment.
What about P45s?
Issue a P45 marked with the date of death.
Related: compensation for work injuries, tax demands in a late spouse’s name and life insurance and IHT.
Talk to Accotax
Want this handled for you? Our team at Accotax can help with employee benefits and payroll. See our payroll services service, or contact us for a free, no-obligation quote.
This page is general guidance based on HMRC rules for the 2026/27 tax year, checked against gov.uk on 16 October 2026. It is not personal advice, so speak to an accountant about your own situation.
