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Chris Hadrill, a specialist employment solicitor at Redmans, answers the question:

“What sums paid to me under my settlement agreement should be free of tax?”

Given that the question is one which is general in nature, it is not possible to provide a specific answer – which sums will be taxed and which sums will not be taxed will vary in each circumstance depending on the particular facts. However, it is possible to provide some general guidelines as to when employees may expect sums to be taxed and when they may expect them to be untaxed – we will examined this as follows:

  1. Which payments under a settlement agreement will generally be taxed?
  2. Which payments under a settlement agreement will generally be free of tax?

Which payments under a settlement agreement will generally be taxed?

‘General earnings’ will normally be subject to tax (and, where applicable, national earnings) under a settlement agreement. General earnings will normally (but not always) include (but are not limited to) the following types of payment:

  • Any salary, wage or fee (salary, bonus, commission etc.)
  • Any other kind of benefit (health insurance, life assurance, car allowance etc.)
  • Anything that constitutes a ‘contractual emolument’ of employment
  • Employer-financed retirement benefits
  • Payments and benefits upon termination of employment (which payments will be deemed to be related to termination will depend on the circumstances)
  • Income from securities
  • Gardening leave payments
  • Consideration for restrictive covenants
  • Contractual payments in lieu of notice

Which payments under a settlement agreement will generally be free of tax?

The first £30,000 of payments that fall within section 401 ITEPA 2003 are generally exempt from tax. Any excess above £30,000 will be subject to tax in the normal way. The following non-contractual payments are generally tax-free:

  • Ex-gratia payments
  • Damages for wrongful dismissal and payment on account of damages
  • Compensation for unfair dismissal or other breach of statutory rights
  • Compensation for injury to feelings and/or personal injury in discrimination cases (although this depends upon whether the discrimination was pre-termination or in connection with termination)

If you have been offered a settlement agreement by your employer (or are an employer offering a settlement agreement to an employee) and you are unsure as to which sums under your settlement agreement should be taxed (and which sums should be free of tax) then it is recommended that you obtain legal advice on your position – this is a reasonably complex area of law and getting it wrong can have potentially serious consequences. However, you may also follow the guidance provided by HMRC on determining the correct tax treatment of a termination payment – HMRC recommends that the following questions are addressed:

  1. Does the payment fall within the category of general earnings (or is it a benefit of the employment) under Parts 2 to 5 of the Income Tax (Earnings and Pensions) Act 2003 (“ITEPA 2003”)?
  2. If not, is it a payment for a restrictive covenant taxable under sections 225 and 226 of ITEPA 2003?
  3. If not, and no other income tax charge applies (for example, compensation for loss of a share option) ,is the payment a payment taxable under sections 401 to 416 ITEPA 2003?

 

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).

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

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Testimonials

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Rob O

Very prompt response and I could not fault the service. My solicitor listened carefully to the details of my case and I felt very confident in the advice I was offered. All emails and work done on my behalf with my former employer was of the highest standard and Redmans helped take a lot of the stress out of the situation for me.

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Mike H

Very professional, friendly, proactive. I would highly recommend Redmans.

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Fantastic and quick service!

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Anonymous

I was very satisfied with Redmans' service. Clear, sensible advice and the bill was in line with their estimate. I would recommend them.

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Eugene A

Excellent communication and guidance provided on the redundancy settlement process. Process was concluded quickly, very satisfied with service.

Posted 2 days ago

Harold d

Great personlised service and quick communication. Solicitor helps greatly in understanding the options and advising best course of action.

Posted 2 days ago

Trish B

Professional and efficient. A pleasure to deal with.

Posted 3 days ago

Omi H

Excellent communication. A tactical negotiator to get the best package for the client. Highly recommended.

Posted 3 days ago

Nicholas S

Very prompt and efficient. Excellent advice.

Posted 3 days ago

Anonymous

Very helpful and always available to help! It was my first time to deal with any solicitors, but I felt very supported until the end!! Well done!! and great Job!!

Posted 1 week ago

Mohamed F

Excellent and professional solicitors, highly recommended

Posted 1 month ago

Anonymous

Redmans Solicitors provided a professional and prompt service in dealing with my settlement agreement. They used their experience to negotiate a better deal for which I am grateful for. I highly recommend their services.

Posted 1 month ago

Cheryl R

Very efficient and friendly lawyers. I have used Redmans twice now and Chris Hadrill has been amazing to work with. Would highly recommend Redmans.

Posted 1 month ago

Anonymous

I found Redmans Solicitors to be extremely professional, dealing with my questions and concerns quickly and in detail. I would have no hesitation in recommending Redmans Solicitors to anyone.

Posted 1 month ago

Anonymous

I requested Redmans services on a redundancy case. Both Chris and Rana were great, thoughtful, very professional and responded quickly. They were very clear throughout the entire process, regarding the process and my options and I couldn't feel I had better legal advice for my case. Overall excellent service and I would certainly recommend and use their services again.

Posted 1 month ago

Anonymous

Responsive, patient, thorough and personable - an excellent service.

Posted 1 month ago

Anonymous

The team at Redmans, Chris Hadrill and Sacha Barrett were always very helpful and had expert knowledge to assist me during my employment law matter, I would not hesitate to recommend them to all!

Posted 1 month ago

Arun T

Chris was punctual, attentive and accurate. He answered my questions with clarity and avoided dubiosity. I would recommend him to anyone seeking legal advice within his remit.

Posted 1 month ago

Yulian Z

Great service

Posted 1 month ago

Anonymous

Excellent, professional service and a speedy resolution. Many thanks

Posted 1 month ago

Taral P

Sacha and Chris were both very helpful in closing out my matter. Sacha was very clear in helping me understanding the documents I needed reviewing, providing a professional service throughout.

Posted 1 month ago