Are ex gratia payments taxable in my Settlement Agreement?
As a general rule, the first £30,000 of the compensation will be tax free. If a Settlement Agreement offers compensation which exceeds £30,000, the sum over and above £30,000 will be taxable.
Ex gratia payments are the non- contractual payments paid by your employer as compensation for loss of office.
If I have been made redundant, will I have to pay tax on the redundancy payments?
Both contractual redundancy payment as well as the statutory redundancy payment fall within the £30,000 exemption. Tax is due once you have reached the £30,000 ceiling for any combination of these payments.
Is notice taxable?
This depends what is stipulated in your employment contract. If you have a pay in lieu of notice (“PILON”) clause in your employment contract, your employer is required to make tax and National Insurance deductions. If, however, your contract does not have a PILON clause, and your employer opts to pay you in lieu, this payment can come within the first £30,000 available tax free exemption. You may require further detailed advise on this.
What else is taxable?
Your salary, benefits and bonus entitlement payable up to and including the termination date will have tax and national insurance deducted in the usual way.
Payments in lieu of holiday are taxable in the same way as salary.
At times, a Settlement Agreement involves an employee to conform with new restrictive covenants. The Employer provides consideration which is often a nominal sum of anything between £100 – £200 and this is fully taxable. Certain Settlement Agreements may also contain a small consideration sum to make a confidentiality clause binding, this is also taxable.
How can we help?
We specialise in Employment law, offering independent legal advice on settlement agreements, previously known as compromise agreements.
We can advise you on any potential claims you may have, can negotiate the best compensation package in the circumstances and will ensure that the settlement agreement provides you with the protection you require.
We may also ask your employer to include a reference in your settlement agreement, giving you peace of mind when looking for your new job.
We can deal with your settlement agreement speedily and efficiently. We’ll explain everything in plain English and we can advise you straight away over the telephone.