Changes to the way you pay tax on a settlement payment 

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

Currently if you receive compensation for the termination of your employment, providing it is truly compensation, and not a contractual payment in lieu of notice, you 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 you work for your notice period or are placed on garden leave during the notice period, then this will need to be specifically stipulated in the Settlement Agreement.

In the absence of working notice or receiving a notice payment in any other manner Employers will need to include a clause covering the ‘Post-Employment Notice Pay’ in the settlement agreement 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: hello@realemploymentlawadvice.co.uk 

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!