Want to talk to an expert employment law solicitor?

You'll receive a callback from a specialist within an hour

The taxation issues relating to termination payments is a crucial factor for both workers as well as business employers when each party is considering a compromise agreement. Each party would like to lessen any tax liability as well as wanting assurance that no future tax obligation will accrue. If the employer does not withhold taxes or National Insurance Contributions owing from the employee’s salary then the company is typically liable for these kinds of sums to Her Majesty’s Revenue and Customs (“HMRC”)

If the suitable terms is incorporated within the compromise agreement then the worker is normally liable for these kinds of payments. Each party will as a result desire clarityrelating to what could or could not possibly be subject to tax under the terms of the compromise agreement.

Payments subject to taxes in compromise agreements

The following payments are normally subject to tax in a compromise agreement:

  • The employee’s salary (including any earnings during gardening leave)
  • Any contractual bonus or commission
  • Contractual payments in lieu of notice (also known as Payment In Lieu of Notice (“PILON”))
  • Consideration for entering into restrictive covenants within a compromise agreement

The definition of the above mentioned four elements will be covered in future articles.

Payments not liable for tax in compromise agreements

The following payments will generally not be liable for tax in compromise agreements:

  • Non-contractual payments made because of the the termination of the employee’s contract of employment and/or redundancy. The employee can take the benefit of a £30,000 tax-free allowance (s.401 to 404A Income Tax (Earnings and Pensions) Act 2003 (“ITEPA 2003”)). This includes terminations relating to:
  1. Damages for wrongful dismissal and payments relating to damages
  2. Compensation for unfair dismissal
  3. Compensation for discrimination to compensate for financial loss in connection with the termination of the employee’s contract of employment
  4. Payments of statutory and contractual redundancy pay
  • Non-contractual benefits in kind given by the employer upon termination of the compromise agreement
  • The contributions of the employer to registered pension schemes. This is tax-free subject to an annual contribution limit of (generally) £50,000. However, the position can be relatively complex).

Other miscellaneous payments:

  • Legal fees in connection with the compromise agreement
  • Outplacement counselling for the employee
  • Retraining of the employee

There may also be more complicated issues that may need expert advice relating to their tax treatment, including the payment of share options and share awards, if applicable.

Practical strategies for compromise agreements

Employers will frequently attempt to place the burden of any tax payment on the employee or worker in a compromise agreement. This is normally achieved by inserting an express contractual term concerning this in the compromise agreement. Whether this express contractual term actually alters the legal position (that the employer is liable for tax and National Insurance Contributions) is dependent upon the facts of the particular case. In the vast majority of situations, the practical issues relating to compromise agreements will mean that this kind of clause is usually included. However, the utilization of such terms (i.e. the employee being made liable for any tax relating to payments in the compromise agreement) is relatively rare so it isn’t normally a “make or break” issue in compromise agreements.

About

Redmans Employment Team deal with employment matters for both employers and employees, including drafting employment contracts and policies, advising employers and employees on compromise agreements, handling day-to-day HR issues, advising on restructures, and handling Employment Tribunal cases for both employers and employees Call 020 3397 3603 to speak to one of the members of our employment team or email us on enquiries@redmans.co.uk. Redmans have offices in Richmond, Chiswick, Hammersmith, Fulham, Kingston, Wimbledon, Ealing, Kings Cross and Marylebone (meetings strictly by appointment only).

Tagged with →  

Want to talk to an expert employment law solicitor?

You'll receive a callback from a specialist within an hour

Share →

Leave a Reply

Your email address will not be published. Required fields are marked *

 

Our awards

Request a callback

Your name

Your email

Your telephone number

Contact us

Please feel free to discuss your own position and concerns. Contact your nearest office on:

T: 020 3397 3603
E: enquiries@redmans.co.uk
W: www.redmans.co.uk

Testimonials

4.63 Average

54 Reviews

David W

A speedy efficient friendly service, I would definitely recommend Redmans Solicitors for processing Settlement Agreements.

Posted 40 minutes ago

Anonymous

Both Rana and Chris were fantastic. From the first phone call I was confident my matter was in good hands. I was not disappointed. I would highly recommend Redmans. Thank you again for all of your support and advice.

Posted 4 days ago

Federico S

Great advices and communication. Through Redmana I obtained match more than what I thought. Highly recommended

Posted 6 days ago

Tom G

A good and efficient service with the required legal advice provided for a settlement agreement.

Posted 6 days ago

Francis T

The solicitor I used was Chris Hadrill, who I found extremely professional and I felt that he made me feel at ease, considering the subject matter he was assisting me with.

Posted 1 week ago

Anonymous

Chris provided excellent assistance with the negotiation of my settlement agreement. From start to finish, I was consitently updated and advised on the best course of action to take. I would highly recommend Chris and Redmans Solicitors.

Posted 1 week ago

Anonymous

They are busy people but manage well so generally I would recommend them.

Posted 1 week ago

Anonymous

Very efficient and professional service from my first phone call making an enquiry. Timescales of the matter in hand were met and within the agreed budget. Would highly recommend Redmans

Posted 3 weeks ago

Lisa B

Really very good service, always available to answer questions, provide my with any information I needed to make informed decisions.

Posted 3 weeks ago

Anonymous

Offered good support and advice

Posted 3 weeks ago

Anonymous

Chris reviewed and managed my compromise agreement swiftly, accurately, helpfully, and on budget. His input on key non-compete clauses was valuable, his communications were clear and concise, and he was always swift in responding. Highly recommended.

Posted 3 weeks ago

Gurbir C

Excellent legal advice service.

Posted 3 weeks ago

Tim

I found Redmans to be very helpful and efficient in conducting my case which was concluded in a timely and diligent manner

Posted 3 weeks ago

Anonymous

I found Redman Solicitors to be very good and worked very well to an extremely tight timescale. I would happily recommend them again especially Rana.

Posted 3 weeks ago

Anonymous

I received excellent, knowledgeable and critically timely support from Chris regarding my settlement agreement, and would wholeheartedly recommend Chris in these matters.

Posted 3 weeks ago

Katelyn

The solicitor communicated well with me and made sure I understood everything. He did everything needed for my settlement agreement and tried to get the wording changed in my favour too.

Posted 1 month ago

Anonymous

Redmans provided excellent services

Posted 1 month ago

Sibel U

Excellent service

Posted 1 month ago

Peter S

I was very happy with the level of advise I received from Caroline Lewis, and a very professional service fron Chris, The advice given really helped me and I was comfortable to sign the settlement agreement following my redundancy. I would be more than happy to recommend your services to others.

Posted 1 month ago

Derek S

I very much appreciated the help provided by Redmans in the settlement agreement agreed with my former employer.

Posted 1 month ago

Waseem M

It was the first ime I used Redmans Solicitors and to be honest, thety were amazing. Rana Tandon and Chris Hadrill were out of this world. They made the process as simply and smooth as can be. Thank you so much for all your support over the last week.

Posted 1 month ago