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Taxation of Termination & Settlement Payments

Changes to the way you pay tax on a settlement payment from 6th April 2018

From the 6th April 2018 the rules governing the taxable status of termination and settlement payments is changing.

Currently if an employee receives compensation for the termination of their employment, providing it is truly compensation, and not a contractual payment in lieu of notice, they can receive up to £30,000 tax free.

The reason being that if an employer pays in lieu of notice when there is no contractual right to do so it is a breach of contract and therefore the payment could be construed as compensation for breach of contract.

This has led to much confusion among employers and employees alike as they try to work out if there will be a requirement to pay tax or not.

This will all change however and for terminations that take place on or after the 6th April 2018 all payments in lieu of notice, regardless of whether there is a contractual right to pay in lieu or not, will be taxable.

If an employee works their notice period or is on garden leave for their notice, then this will need to be specifically stipulated in the Settlement Agreement.

In the absence of an employee working notice or receiving a notice payment in any other manner Employers will need to include a clause covering the ‘Post-Employment Notice Pay’ and make the payment as a separate amount subject to tax and NI deductions.

Whilst this does clear up some of the confusion that arose around tax on settlement payments it does take away one of the benefits of agreeing to a settlement namely tax-free notice pay.

If you would like advice about settlement agreements, settlement payments or the termination of employment please get in touch our email is: 

Alternatively if you have a question and you do not mind making it public you can add a comment below and we will respond.

 This article was written and researched by Alison Colley, Solicitor and Director of Real Employment Law Advice

 Don’t forget getting advice from a Solicitor does not have to be complicated or costly!

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The information contained in this blog post is provided for guidance and is a snapshot of the law at the time it is written. It is provided for your information only and should not be used as a substitute for obtaining legal advice that it specific to your particular circumstances.

The guidance should not be relied upon in any decision making process. It is strongly recommended that you seek advice before taking action.

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