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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
E: enquiries@redmans.co.uk
W: www.redmans.co.uk

Testimonials

4.76 Average

204 Reviews

Anonymous

Excellent advice and customer service.

Posted 1 month 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

Anonymous

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

Anonymous

Posted 3 months ago

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

Posted 3 months ago

Anonymous

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

Anonymous

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