“It is a common misconception amongst many workforces that any and all termination payments made to compensate an employee for the loss of their employment can be made tax free or that the employer has some sort of discretion to decide whether to pay tax on these payments or not ”

With regards to the above, it suffices to say that whether or not payments made under a settlement agreement are taxable is contingent on the basis to which the particular payment relates. Compensatory payments and end of employment bundles in settlement agreements often include a variety of contractual and non-contractual provisions, in which some may be subject to income tax and some of which may be tax-exempt. Also, the nature and the background of the issues and occurrences which have brought up the necessity of the termination of employment and/or the settlement agreement is another factor that majorly influences or determines the tax positions which each payments and settlements to be made. The employer should start by precisely identifying each payment within the termination package and then considering the tax provisions applicable to it. Questions relating to whether such payments are part of general earnings and benefits of employment or such payments are done in execution of the provision of a particular special covenant.

With regards to this, Section 62 of the Income Tax (Earnings and Pensions) Act 2003 provides for the payments chargeable to income tax and the general earnings and benefits of an employment to include signing bonuses, salaries, wages and payments for and in lieu of holiday and all other payments which have been made preceding to the termination date;. On the other hand, other earnings. such as outstanding bonus and commission payments; material benefits in kind, payment ratifying post-employment restrictive covenants; and payments contingent upon termination of employment that cannot be charged to income tax in any other way up to amounts not exceeding £30,000
As provided for by Section 401 of the Act provides that payments such as ex-gratia payments, redundancy payments, non-contractual payments in lieu of notice and compensatory payments for discriminatory and wrongful dismissal claims have the £30,000 of their payments exempted from being taxed.
As at the 6th of April 2018, all termination payments, whether contractual (e.g. bonuses and commissions and other payments accrued over the period of notice) or non-contractual, will be treated as general earnings and subject to tax and national insurance; and all payments in lieu of notice, whether contractual or not, will be subject to tax.
Prior to this, it was a categorized provision where while contractual payments in lieu of notice were subject to tax, non-contractual payments in lieu of notice exempted form tax up to £30,000. Summarily, the major significance of the provision change laid with the removal of the distinction between contractual and non-contractual payments in lieu of notice
The legal fees of the legal advisor payable by the employer for the services rendered to the employee’s solicitor in respect of the settlement agreement is not taxable provided that such fees are expressly provided for in the settlement agreement and the activities of the legal adviser were solely for the purpose of the settlement agreement advice.

You can call us on 0207 183 0084 or email us on employment @olaleslie.com for any queries about Settlement or Compromise Agreements . We are always happy to assist and can usually arrange appointments for Independent Legal Advice at short notice