Question about tax indemnity clause in compromise agreement

xxxpinkladyxxx

I've taken voluntary redundancy and have just had a draft compromise agreement through. My payment will be under £30k and the agreement states:

"The employer is proceeding on the basis that the termination payment will not be subject to deduction of tax or national insurance contributions and will therefore pay it to the Employee free of tax and national insurance contributions. However, the amount of tax is ultimately a matter for HM Revenue & Customs and the employee shall be responsible for the payment of any additional income tax and employee's National Insurance Contributions in connection with any payment to be made or benefit to be provided by the employer pursuant to this agreement, save for any tax deduction at source by the Employer."

The next clause says:

"The employee undertakes to the employer to indemnify the employer in full against any such liability including interest, penalties, costs and expenses. However it is agreed that no such payment of tax, National Insurance Contributions, interest, penalty or fine will be made to HM Revenue & Customs without particulars of the proposed payment being sent to the Employee promptly at the above address and the Employer shall provide her with responsible access to any documentation she may reasonably require to dispute such a claim."

What exactly does this mean? How will I know if tax is payable on my redundancy payment? I am totally clueless when it comes to tax issues.

zzzLazyDaisy

It is a standard clause.

The law says that if the employer pays a sum of money to the employee and it later turns out that tax should have been paid on that money, then the liability for the unpaid tax passes to the employer, and the employer cannot reclaim that money from the employee. So this is a catch all clause which reverses that liability, and says, in effect, that we all believe that this payment is tax free, but if for some unknown reason the rules changed or HMRC decides that some part of this sum should have been taxable, then you agree to pay back any tax we have to pay on your behalf.

Redundancy payments up to £30k are not taxable.

If the severance package includes any outstanding holiday pay, then that is taxable and should be paid through the payroll in the normal way.

A sticky one can be payment in lieu of notice - if there is no clause in the contract/handbook giving the employer a contractual right to make a payment in lieu of notice and there is no established history of making a payment in lieu of notice so as to give rise to a contractual expectation, then the PILON is tax free, but in some other cases it is taxable.

So it is standard practice for the employer to insert this clause into a compromise agreement.

I hope this helps?

Dx