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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:

T: 020 3397 3603
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Testimonials

4.76 Average

124 Reviews

Brittany

I was very grateful for Redmans to treat my case with respect and discretion. At the time, I was very new to London and it was meaningful to have someone on my side and win the case for me. Without any doubt, I would definitely recommend Redmans Solicitors to anyone who is in need of it.

Posted 4 months ago

Jake L

Chris is very professional and calm. Very attentive and patient, been a positive experience having Chris represent me, and would recommend him.

Posted 5 months ago

Anonymous

Excellent service. It was a pleasure to work with Chris H, who is brilliant at what he does and very efficient. Their Senior Associate Rana T. is also very knowledgeable and resolves any queries speedily and efficiently. My issue could unfortunately not be resolved, but that was due to my employer and not the firm. Redmans however did all they could. I would definitely recommend them.

Posted 5 months ago

Anonymous

Very pleasant and quick to deal with. Mnay thanks.

Posted 5 months ago

Anonymous

Easy to get hold of. Quick.

Posted 6 months ago

Owen J

Very helpful, efficient service.

Posted 6 months ago

Anonymous

I am very lucky that I worked with Mr. Chris Hadrill and he managed my case very progressively with an analytical approach and trustfully. Of course with a very positive result. I strongly recommend Mr. Hadrill to any one seeking for a successful result from a highly qualified solicitor.

Posted 6 months ago

Kulbir S

Amazing, quick friendly service from Chris from the start and Caroline. They made me feel at ease during a difficult time, they understood and advised accordingly and I am really happy with the outcome of my case. Will always advise anyone who needs legal advice to contact Redmans, I’m so glad that I did and can confidently say I don’t think any other firm could have handled my case any better. Well done guys, wish you all the best and please keep doing what your doing, simply the best!

Posted 6 months ago

Mark A

Excellent service - rapid and “to the point” advice given to ensure meeting the target time frame

Posted 6 months ago

Anonymous

Chris Hadrill kept me sane during the negotiations with my employer. He was courteous professional and he cared about doing the best he could for me. I will use Redmans again if ever I need an employment solicitor. Excellent service.

Posted 6 months ago

Muhammad Z

Awesome services. Professionals at their best .

Posted 6 months ago

Anonymous

Thanks for the advice and for negotiating a good outcome. Good to have the support at a very stressful time

Posted 6 months ago

Chloe F

My solicitor at Redmans was very helpful and efficient. Really pleased with the smooth service.

Posted 6 months ago

Anonymous

Chris was absolutely excellent. Clear and concise, offering sound advice.

Posted 6 months ago

Tim O

Experienced and competent advisors

Posted 6 months ago

Rachel A

Quick and expert assistance. I would highly recommend Chris for any of your legal needs.

Posted 6 months ago

Joe S

I was very happy with the service provided by Chris and the team at Redmans Solicitors. I felt very comfortable discussing all matters with Chris and am very grateful for all the help and guidance I was given throughout the whole process. I would definitely recommend Redmans Solicitors to friends and family!

Posted 6 months ago

Anonymous

I had a very good experience working with Chris Hadrill during a difficult and emotional time. This held true from the moment I spoke to him on the phone, to the end of the process. Overall, he was attentive, professional and highly supportive. He provided sound advice and clarity. It was the reviews that led me to Redmans! I was very happy to know they were all true. I highly recommend working with Redmans Solicitors. Thank-you to the entire team!

Posted 6 months ago

Anonymous

Good service

Posted 6 months ago

Anonymous

Excellent professional service. Highly recommend.

Posted 7 months ago

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.

Posted 7 months ago