When your employer offers you a sum of money to settle a claim you’ve made against them, or in return for being made redundant, you might wonder about the tax implications.
The headline news is that any settlement up to and including £30,000 is currently tax-free.
However, it’s not as simple as that.
The lump sum you’ve been offered is made up of different components, some of which may attract tax and national insurance. These elements may include:
- Statutory or enhanced redundancy pay
- Compensation for unfair dismissal or other claim
- Payment for accepting restrictive covenants
- Wages you’re owed
- Any outstanding holiday pay you’re due
- Payment in lieu of working your notice period
There’s more information about each of these below.
Redundancy
HMRC will need to be satisfied that you have actually been made redundant – that is, your job role is no longer required.
If yes, then any amount up to and including £30,000 is tax-free.
Compensation
If you have been awarded compensation for discrimination or another workplace claim, the money is intended to make up for your pain and suffering. It’s not considered to be earnings.
Historically, such payments have been tax-free however a recent change in the law means that these types of payment may also be subject to tax.
Wages
These will be taxed as usual.
Holiday pay
This is also taxable, just as it would be if you carried on working.
Payment in lieu of notice (PILON)
Since April 2018, this amount is now taxable too, except in cases of wrongful or constructive dismissal.
Restrictive covenants
You may receive a payment in return for agreeing that you won’t do certain things within a set period after leaving your employer. These might include not working with former colleagues, suppliers or customers for a year, for example.
This amount is considered to be earnings, so they do attract tax.
What this means to you
If you’re offered £30,000 or less, and you’re able to use up your holiday period and work your notice, it is unlikely that you will have any tax to pay.
To make it easy for HMRC to calculate the amount of tax and NI you owe, and ensure you pay them the right amount, the payment breakdown should be clearly defined in the settlement agreement.
For any settlement agreement to be binding, you need independent legal advice. Of course, we can help with that (and your employer will have to pay for the legal advice you receive).
P.S. In Northern Ireland, a settlement agreement is known as a compromise agreement.
Need help?
For a FREE assessment of your claim, call 0808 168 7288 or fill in the contact form on the top right of this page.
We have already helped thousands of people to win millions of pounds in compensation.
You have a choice of ways to pay, including ‘no win, no fee’.