Is Compensation for unfair dismissal taxable?

kborom

I am hoping to get some compo from a previous employer for unfair dismissal and wondered if either of the following is taxable:

1. Compensation agreeed with the previous employers outside of a tribunal.

2. Compensation awarded at an employment tribunal.

Thanks in advance for any help/advice.

caseydog_2

Hi there,

Generally the first £30,000 is untaxed.

It's a bit complex as there's some debate over whether the payments are compensation, or wages due. If it's compensation for non payment of wages then the £30k non taxed rule applies, if it's wages, albeit late payment, then it could be taxed.

A settlement before the hearing gives you a bit more flexibility as you could go for a rounded off figure that's not directly linked to your exact pay rates. Alternatively, if the employer is anxious about tax, you could write in the agreement that the parties believe the payment is not subject to tax, ni deductions, but if it's later determined that they should have been the claimant will undertake to accept liability for these payments - I've never know HMRC to unpick such agreements.

kborom

Hi Caseydog,

Thanks for the response. I assume that any redundancy payments already received also count toward that £30K tax free?

caseydog_2

I'm not sure that they do actually, but I'm no tax expert so maybe someone will come along soon with the answer.

The reason I'm doubtful is that if someone has another job at the time of tribunal then the tax free £30k would apply to a tribunal award, so I presume the earnings / income in the tax year doesn't get taken into account. Also, if you're claim is for U/D and the tribunal determines it was a sham redundancy, then the earlier RP would be classed as an ex gratia payment - a windfall if you like.

I'd be interested in the answer to this one, too!

c-a-t-h

I am now in this exact situation and cannot get advice to help!!! I was made redundant and received a redundancy payment of just over £25k, However through the Union I have taken them to task and just been offered an out of court settlement for £25K.. I have been advised by the solicitor that this will be taxable as anything over £30K for the same incident is taxable so £20K of my compensation will be taxable.. However, I have spoken to the tax office who advised me this compensation would not be taxable!!! Who do I believe?? ALSO who informs the tax office that I receive a payment for £25K??? Please can anyone advise?? No doubt I will find the answer soon as I have accepted the offer.