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Where Taxpayers and Advisers Meet

Tax considerations for settlement agreement

Joined:Wed Jul 06, 2022 2:13 pm
Tax considerations for settlement agreement

Postby Employee » Wed Jul 06, 2022 2:34 pm

Hi. After a prolonged discrimination claim with my employer, they are offering a settlement agreement. This is considerably lower than I expected, however, they have indicated that some of this will be tax free (including payments in lieu of notice, psychiatric injuries, therapy costs and injury to feeling). I am confused about whether these payments really are going to be tax free or whether I would have a tax liability. Also, are there limits to how much can be tax free for each of these items? I assume there must be otherwise what's to stop people from putting everything into these buckets to minimise or avoid tax altogether? I'm also not sure if I should have a tax advisor for this or if the rules are straightforward.

Many thanks

Joined:Mon Mar 11, 2019 4:22 pm

Re: Tax considerations for settlement agreement

Postby Jholm » Thu Jul 07, 2022 11:13 am

Don't take their advice.

The first item (payment in lieu of notice) constitutes earnings and would be taxable.

The general rule is that any compensation/payments that relate to earnings, or loss of, is taxable as employment income

Joined:Wed Aug 02, 2017 9:09 pm

Re: Tax considerations for settlement agreement

Postby darthblingbling » Thu Jul 07, 2022 1:35 pm

Genuine ex gratia payments, less any deemed post employment notice payments (PENP), can typically be paid tax free subject to a £30k threshold.

The PENP is essentially what your legal or contractual notice pay should have been, less what you actually received. But ultimately anything contractual will be taxable.

Some other payments, can be paid tax free outside the £30k threshold, such as some of what you've outlined, but it's fairly grey, especially with regards to psychological injury.

May want to ask your employer what tax advice they've received, perhaps even ask for a copy. It's a fairly complex area of employment tax that we see employers get wrong again and again.

It's the employers obligation to get the PAYE and NIC correct, but you could obtain your own advice if you believe they are processing incorrectly. Maybe they would cover the fees within the settlement agreement.

Joined:Wed Jul 06, 2022 2:13 pm

Re: Tax considerations for settlement agreement

Postby Employee » Thu Jul 07, 2022 6:03 pm

Thanks very much for the responses. I appreciate the help.

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