Will you be taxed on the ex-gratia payments in your Settlement Agreement?
An ex-gratia payment is a payment made by the employer without any contractual obligation to do so. For instance, it will not include notice periods or holidays. The first £30,000 of any ex-gratia payment may be paid tax-free.
If you have been made redundant, will redundancy payments be payable tax free?
The statutory redundancy payment will be paid tax free. Any other elements of the redundancy payment will be subject to the usual tax rules. So sums contractually due will be taxable and genuine ex gratia payments up to £30,000 including any redundancy payment made will be payable tax-free.
What about pension contributions?
Subject to annual allowances pension contributions can be paid tax free.
Will your pay in lieu of notice be taxable?
Yes.
Will your salary, bonus and benefits be subject to tax as normal?
All contractual sums will be taxed as normal.
What is Post Employment Notice Pay (“PENP”)?
PENP is a statutory calculation to assess what tax should be payable on a termination payment. To the extent that a payment can be attributable to the period of notice that should be given under the contract the payment will be taxable. PENP is the basis for the HMRC tax calculation.
If you have accrued but untaken holiday, will the pay in lieu be taxable?
Yes.
Are contributions to outplacement services taxable?
Payments for re-employment counselling and similar training for employees can be tax free if they fall within the tax exemption for counselling services provided by the legislation.
Should the consideration payment for restrictive covenants be subject to deductions?
Restrictive covenants seek to restraint the employee from competing after termination of employment. If there are new restrictive covenants in the Settlement Agreement then the only way they can be legally binding is if a payment is made by way of consideration. That payment will be taxable.
Taxation of share options and share awards
Such payments will be subject to the tax rules applicable to the scheme in question.
Can payments for personal injury and injury to feelings following discrimination be paid tax free?
These can be paid tax free in certain circumstances and advice should be taken.
What if the termination payments are staggered across the end of a tax year?
The general rule is that there can only be one £30,000 ex-gratia payment for termination. The tax to be paid on the taxable element of the settlement will be calculated with reference to the tax year in which it is paid or the tax year in which the employee can require it to be paid.
What legal fees are involved with a Settlement Agreement?
A contribution to legal costs incurred solely in connection with a termination of employment where a Settlement Agreement is agreed between employer and employer may be paid tax free by the employer subject to certain HMRC rules.
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