Tax treatment of settlement payments

In this case, the Tax Tribunal found that a payment made in a settlement agreement where discrimination was alleged in relation to a redundancy exercise was taxable, subject to the £30,000 exemption.

This even though injury to feelings compensation for discrimination are usually not taxable.

Background

This case relates to a senior employee who worked for an engineering contractor. He was made redundant, and subsequently brought an Employment Tribunal claim alleging unfair dismissal and age discrimination. He ultimately entered into a settlement agreement with his employer in return for an ex gratia payment of £200,000 by way of compensation.

As the claim had been for unfair dismissal and age discrimination, the claimant argued that it should not be taxable as it related to injury to feelings and age discrimination. Previous authority suggests that such payments should not be taxable.

However in this case t(Moorthy v Revenue & Customs) the Tribunal was clear that once it had been established that there was a connection between the payment and termination the entire amount would be taxable subject to the £30,000 exemption.

The payment would only be completely tax-free if the discrimination was completely unrelated to the termination, and happened prior to it.

Comment

Employers need to be careful when drafting settlement agreements that they are not too enthusiastic about operating the tax exemption for injury to feelings awards. As long as the payment is made in connection with or is related to the termination of employment it will be taxable, subject to the £30,000 exemption.


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