Ex-Gratias Payment & Tax / NI

d3liberate

I lost my job (performance grounds, not redundancy) and have been offered an ex-gratias payment in excess of £30,000 and I am trying to work out my Tax/NI liabilities prior to accepting this offer.

Note: I was paid PILON which was subjected to Tax/NI.

The ex-gratias offer is made up of two parts. The first is £60,000 (to be paid to me) and the second is £10,000 (to be paid to university to fund my studies)

Q1. Am I correct to understand of the £60,000 payment, the first £30k is exempt from Tax/NI and the remaining £30k will be subject to tax (but not subject to NI)

Q2. Will the £10,000 paid directly to the university be seen as a benefit, which will form part of my £30k tax free settlement? This is very important for me to know.

Q3. If I (successfully) go down the tribunal route, and I am awarded compensation for a) unfair dismissal and b) discrimination, the unfair dismissal award would have the £30k exemption and the discrimination award would not be subject to either Tax or NI. Is there any option where I can agree with the employer (without going to a tribunal) to pay me under these terms (ie: £30k ex-gratias and £30k compensation for discrimination) so that I would get the full £60k exempt from tax. I would get this if I go down the tribunal route, but easier if I settle with the company.

Derwent

1. Your understanding is correct.


2. The two amounts will be added together so £30k will be tax free and £40k will be taxable, no matter how they are split by your employer.


3. You say you were dismissed on performance grounds, not discrimination. You would only have a case for discrimination if you could show it was attributable to a protected characteristic such as race, disability, gender. In any case, I can't see any employer admitting to committing discrimination in a legal settlement agreement as they are usually done on a no fault, without prejudice, basis.

d3liberate

Thank you for the reply. What do you make of these points?

a) As I understand it, under Section 311 ITEPA 2003, Employment income: retraining expenses paid by employer: exemption from tax, could make the £10,000 university option exempt from tax?

"Certain employees, and former employees, are exempt from any charge to tax in respect of costs met by their employer, or former employer, for training courses enabling them to acquire skills or knowledge which might help them to obtain further employment"


b) Compensation for Discrimination.

Where the employee has alleged discrimination, advisers should consider whether any part of the termination payment is compensation for this. Any compensation which is wholly attributable to discrimination occurring before termination should be outside the scope of income tax and NIC because it is neither earnings nor taxable under ITEPA 2003.

The most common example is a payment for injury to feelings where this is attributable solely to alleged discriminatory acts occurring before the termination. Traditionally, the amount of compensation allocated to injury to feelings has been in accordance with the guidelines in Vento v Chief Constable of West Yorkshire Police [2002] ECA 1871 which suggest, depending on the seriousness of the case, compensation between £500 and £30,000.

However, following Oti-Obihara v CRC [2010] UKFTT 568, there may be scope for allocating compensation significantly in excess of this amount, although advisers should ensure that the amount allocated is commercially justifiable, bearing in mind the negotiations between the parties.

In Oti-Obihara the First-tier Tribunal held that a payment to compensate an employee for alleged discrimination was outside the scope of income tax other than to the extent that the payment compensated the employee for his financial loss on the termination of his employment.

The tribunal calculated how much of the settlement payment was compensation for the employee’s financial loss on termination, which was broadly the amount of salary and benefits that the employee would have received during the period it was anticipated that it would take him to find a new job (18 months in that case). This part of the payment was eligible for the £30,000 exemption.

The remainder of the payment was held to be compensation for discrimination and was therefore outside the scope of income tax. The tribunal considered that it was not bound by the Vento guidelines because these were concerned with awards made by employment tribunals rather than settlements negotiated by the employer and employee.

The tribunal acknowledged that an employer may be motivated to provide more generous compensation to maintain confidentiality or protect its reputation.

MEM62

Your employer has dismissed you on performance grounds so, unless you can make a proper case to challenge this a tribunal is a non starter.

It is unusual for this type of dismissal to be accompanied by any kind of severance payment and what you have been offered seems very generous. Take it, smile, draw a line under the situation and move on with your life.