Want to talk to an expert employment law solicitor?

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

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).

Want to talk to an expert employment law solicitor?

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

Share →

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

    Testimonials

    4.76 Average

    235 Reviews

    Paul O

    Chris & Rana guided me through a redundancy discussion. Prompt & patient assistance with the documents & meetings. Clear advice & fast responses regarding negotiations. Would definitely recommend & would use again without hesitation.

    Posted 1 month ago

    Anonymous

    Outstanding, efficient service. Thank you so much!

    Posted 1 month ago

    Jaswant S

    Very very happy with the good service I got Thank you so much for your help

    Posted 1 month ago

    Anonymous

    Mel and Chris were fantastic and supportive throughout! 1000% recommend.

    Posted 1 month ago

    Emma D

    Good responsive service

    Posted 1 month ago

    Mike T

    Good efficient service.

    Posted 1 month ago

    Brenda G

    Very professional and helpful

    Posted 1 month ago

    Charles A

    Chris Hadrill was recommended to me when I found myself in need of a solicitor at very short notice. He contacted me almost immediately to arrange a call. Chris handled my case in a professional and timely manner and kept me notified throughout. Chris inspired confidence and made me feel I was being cared for. If ever I'm in need of legal representation, I would not hesitate to contact Chris. And will gladly recommend him to family and friends.

    Posted 1 month ago

    Rosalind R

    I was very happy with the service that I received from Redmans Solicitors. They were able to advise me accordingly with regards to my employment matter and stay within the agreed costing.

    Posted 1 month ago

    Karl B

    Caroline and Chris were so helpful and friendly. Couldn't of asked for a better service.

    Posted 1 month ago

    Dimitrios P

    Excellent, professional service, in time and within the expected value.

    Posted 1 month ago

    Barbara K

    Everything quickly and fairly. Very professional. Thank you.

    Posted 1 month ago

    Sabrina J

    I received a efficient professional service during the whole process of liasing between myself and my former employer to getting all forms signed and receiving my redundancy payment in full in the summer of this year.

    Posted 1 month ago

    Anonymous

    I received legal advice on a redundancy settlement agreement from Redmans Solicitors and was very impressed by the quality of their service. Chris Hadrill is highly experienced in settlement matters and was especially understanding of the particulars of my case, going out of his way to ensure that it was resolved quickly and with the utmost professionalism. I have no hesitation in recommending Redmans to anyone in need of employment advice and settlement resolution.

    Posted 1 month ago

    Anonymous

    Excellent service, with full explanations of everything needed. Both Chris and Mel answered all emails very promptly and were personable and efficient.

    Posted 1 month ago

    Anonymous

    I would like to thank Chris Hadrill, in particular who handled my case, for all his hard work, expertise and dedication. He listened with empathy and offered suitable advice, which made me feel valued and confident through a difficult time. I would highly recommend Chris and the team at Redmans Solicitors. Thank you.

    Posted 1 month ago

    Yann G

    Yann Guezennec / Chris Hadrill - Thanks for the detailed, informed and professional advice for my settlement. When comprise is the rule I felt we could have been maybe a bit more aggressive from the start. However an acceptable outcome considering the situation. Thank you

    Posted 1 month ago

    Valentina D

    Great service from Mel, she was very good at explaining every part of the settlement agreement and very efficient dealing with the HR team. Very professional team, I would definitely use them again in future if the opportunity came up.

    Posted 1 month ago

    Olaf S

    I was very happy with the service that I have received. Thank You Regards

    Posted 1 month ago

    Rebecca A

    I had a wonderful solicitor called Caroline who was so helpful and gave me all the information I need and explained everything in detail so I was crystal clear. Would highly recommend if you are in need of a solicitor!

    Posted 1 month ago

    Gareth J

    Very efficient, helpful and pragmatic support from Caroline. Happy to work with my requirements / suggestions but also made some very good points which helped to achieve a higher settlement amount. Would highly recommend Caroline and Chris.

    Posted 1 month ago