Tax and Settlement Agreements

Tax and Settlement Agreements : Why it is important to take expert legal advice.

When a Settlement Agreement is entered into an employee can agree to waive their rights to bring a legal claim in return for a sum of compensation. Up to £30,000 paid as compensation under a Settlement Agreement can be tax free.  

But not all payments made under a Settlement Agreement are tax free. The Settlement Agreement must therefore make it very clear how the payment to the employee is calculated and which elements are taxable/non taxable. 

Furthermore, although the employer will pay the tax, the employee could be legally liable for any excess tax.

It is therefore important that you receive expert legal advice when entering into a Settlement Agreement.

Our fees will be paid by your employer so financial considerations should not prevent you from getting the best possible legal advice. Our solicitors are experts in Tax and Settlement Agreements. They will scrutinise the Settlement Agreement and ensure that correct amount of tax payable by the employer is identified so that you are not faced with any nasty surprises.

The £30,000 Tax Free Sum

In addition to compensation, redundancy payments are included within the £30,000 exemption.

Legal costs will not be taxable or count towards the £30,000 exemption, provided they relate to the termination and are paid direct to the employee’s solicitor under the terms of the Settlement Agreement. 

Payments that are not included in the Settlement Agreement Tax Free Sum

Here are examples of some payments that are commonly made following the termination of employment which may not be tax free:

  • Salary and employment benefits

Any payment relating to salary or employment benefits acruing before the employment contract ended will be taxable.

  • Payments in lieu of holiday or notice

Any Payment that is made in lieu of holiday or notice will be subject to tax and National Insurance.

  • Payments for ‘injury to feelings’

While any payment that is made to compensate for ‘injury to feelings’ relating to unlawful discrimination taking place prior to the employment being terminated is not taxable, if the injury to feelings was caused by the termination itself then the compensation will be subject to tax.

  • Payments for restrictive covenants or a confidentiality clause

Any payment made in respect of a restrictive covenant or a confidentiality clause in the Settlement Agreement will be subject to tax and NI.

For further information about Tax and Settlement Agreements give us a call or email us at [email protected]