Colin Foote, Director - Employment & Equality Law
If you are going through a redundancyprocess, your employer may well prefer to have you sign a compromise agreementwhereby you agree not to pursue any potential claims against them.
You may, however, have questions abouthow much tax you have to pay on any lump sum payment and these are validquestions to ask. It usually depends on how well the compromise agreement hasbeen drafted and how much the payment actually is and whether you are leavingyour job or not.
If you are leaving your job, yourcompromise agreement payout and any money owing to you is classed as atermination payment by HMRC. This means that the taxrules under termination payments apply.
In these circumstances you have a taxfree limit of £30,000. If, however, you leave without working your notice andare paid in lieu, this will be taxable. In addition, if you have wages owing toyou along with any unused annual leave, these are all taxable. However, anyredundancy payments are tax free and any compensation payments made fordiscrimination at work will also be tax free.
An interesting case was heard at anEmployment Tribunal recently where an employee of a bank was pursuing a racediscrimination claim against his employer as he claimed he was paid less in hisbonus than his colleagues as a result of his race. To avoid the claim, the banktold the employee he was being made redundant and was offered a settlementagreement by his employer to ensure that he was not going to pursue theexisting claim or make any further claims against them.
He was paid £1,650 in statutory redundancy,£48,898 as an ex-gratia redundancy payment and £600,000 in settlement of hisclaim and any future claims. HMRC asked his employer for clarity around the£600,000 and what this was made up of so they could apply the correct taxarrangements to this sum and his employer told HMRC that his claim did holdsome merits and therefore the £600,000 was made up of the bonus payments hemissed out on.
HMRC then taxed this payment asearnings. He went back to court and appealed this decision claiming that the moneyhe paid was compensation because of the discrimination claim. He succeeded atappeal and was allowed the full amount tax free.
This shows that it is important to havethe compromise agreement worded and drafted correctly.
Formore information about this article or any aspect of our employment andequality law solutions, please give Colin Foote a call us on +44 (0) 28 9077 4500(there is no charge for initial telephone discussions).
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