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.


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 first name (required)

Your last name (required)

Your email (required)

Your telephone number (required)

Brief details of your enquiry

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


4.76 Average

204 Reviews


Excellent advice and customer service.

Posted 4 weeks ago

Aneet G

I would definitely recommend Redmans. Very impressed with service provided. They were extremely proactive in handling my case which made things easier for me. Provided sound advice and resolution. Special credit for this goes to Chris who dealt with my case with great determination and consideration.

Posted 1 month ago

Fern M

Very efficient and friendly

Posted 1 month ago

Neville S

A professional and friendly service, which I would highly recommend.

Posted 1 month ago

Daniel T

Extremely helpful and made a bad situation much more manageable. Where other solicitors seemed disinterested in my situation Redmans immediately made me feel like it was a team effort to achieve a more favourable outcome

Posted 1 month ago

Paul T

Excellent, quick and informative. Chris was a real star and gave me confidence during the uncertainty if a redundancy settlement.

Posted 1 month ago

Marina E

Felt in very capable hands was listened to and given excellent advice. Would not hesitate to recomend and use again if needed.

Posted 1 month ago

Rosa B

Fabulous service all round.

Posted 1 month ago


Redmans were quick to respond to my enquiry and dealt with my case professionally and personably. I received sound advice and was put at ease by Chris Hadrill, Partner.

Posted 1 month ago

Alkhas K

Excellent service.

Posted 1 month ago

Mathias G

Contacted them regarding my end of employment agreement. Chris Hadrill dealt with it and was done and handed back to employer same day more than happy with there service.

Posted 2 months ago

Mark W

Most professional from start to finish offering very a personal service. Most impressive and quick when dealing with the matters in hand.

Posted 3 months ago


Posted 3 months ago


I am very glad I came across Redmans Solicitors. Fantastic service!

Posted 3 months ago


Fantastic communication, always happy to answer queries, highly recommended.

Posted 3 months ago

Wavenie B

They were very straight to the point, friendly and understanding people. I felt they had my best interest. They were easy to get hold of, replies were almost instant. 5/5 for customer service

Posted 3 months ago

Christina P

Caroline was fantastic to work with - extremely knowledgeable, supportive, thorough and honest. I definitely recommend Redmans!

Posted 3 months ago


Very well done and fast support. Professional and reliable. Highly recommended!

Posted 3 months ago

Helene L

They were very knowledgable in the respected area in terms of change in law/regulations that is crucial for the clients who are seeking for legal arvice.

Posted 3 months ago

Sara R

Very helpful and wonderful advice

Posted 3 months ago

Marie D

very good service all digitalised

Posted 3 months ago