Tax implications of a Settlement Agreement

General_Grant

househunt said:

Thanks so much DoctorStrange.  That's so helpful and clearly explained.  I appreciate that it's just a rough amount, but it gives us an inkling of what to expect.  Yes, I hope to explain to my wife that she needs independent financial advice. 

No she doesn't have any taxable state benefits. 

Couple of questions though. 

I know, you gave me the numbers, but how did you exactly calculate these and what tax bands did you apply?  

I can't find any settlement calculators, so if you know of any links then that would be really appreciated.

Thanks again 

You said she had been receiving benefits.  Are you sure none are taxable?  For example, Jobseekers Allowance and Carers Allowance are both taxable.  And she was dismissed from her employment and received her final pay for that prior to 6 April 2021?

You are aware of the different tax bands (and can look at detail at Tax rates 2020/21: tax bands explained - MoneySavingExpert ).  So look at the total income to be expected for the year to 5 April 2022.

househunt

Yes, she's been receiving benefits for a number of years now.  Correct me if I'm wrong, but I'm sure I read somewhere that universal credit, ESA and child benefit are not taxable, are they?

Regarding calculating total income for April 21/April 22 - Just so that I understand this correctly Do I:-

• Ignore the first £30k of the settlement?
• Include the remainder £40k as income?
• Include universal credit, ESA and child benefit received for April 21/April 22 as income?
• Include any savings such as Help2Save? 

DoctorStrange

ESA and JSA are taxable, and Child benefit can be depending on the total income. 

https://www.gov.uk/income-tax/taxfree-and-taxable-state-benefits

Add up all the benefits she's received this tax year, add £40k to that and enter the numbers here:

https://www.uktaxcalculators.co.uk/#tax-calculation


That'll show you a good estimate and breakdown.

General_Grant

househunt said:

Yes, she's been receiving benefits for a number of years now.  Correct me if I'm wrong, but I'm sure I read somewhere that universal credit, ESA and child benefit are not taxable, are they?

Regarding calculating total income for April 21/April 22 - Just so that I understand this correctly Do I:-

• Ignore the first £30k of the settlement?
• Include the remainder £40k as income?
• Include universal credit, ESA and child benefit received for April 21/April 22 as income?
• Include any savings such as Help2Save? 

Google (other search engines are available) can be your friend.

Try Income Tax: Tax-free and taxable state benefits - GOV.UK (www.gov.uk) 

Savings interest depends on how much.
Try reading Tax on savings interest - GOV.UK (www.gov.uk)

Savvy_Sue

househunt said:

Yes, I hope to explain to my wife that she needs independent financial advice. 

It isn't financial advice she should get, it is LEGAL advice. 

A solicitor will have drawn up the settlement agreement on behalf of her former employer. Some of the clauses are likely to be fairly standard, but sometimes there might be something unusual in there. 

Your wife needs to find a solicitor specialising in EMPLOYMENT law: not house sales, family or criminal law. 

There should be a clause in that agreement offering her a fixed sum of something like £250 to pay for this advice. If that isn't there, it's the first thing an employment solicitor would point out (hopefully). 

That then puts your wife on a more equal footing with her employer: someone who understands what the agreement says is being paid to READ it, check for any oddities, and explain it to your wife. If there is anything in there which appears to be particularly unfair to your wife - like no agreement to pay for her to get legal advice - then the solicitor would advise her of this and get it sorted! 

Once she has the dosh, she may need financial advice, but that's for later! 

househunt

Thanks guys - Really appreciate it.

@DoctorStrange - For ESA, she has so far received approx. £3800 since 06 April 2021.  No JSA.  Do I add the £3800 whilst the £40k is gross or do I add it when tax/NI have been removed?  Lastly do I calculate it on basis of 20% basic and any extra as 40% high?

@General_Grant - Thanks very much for the links.  She only has £2k or thereabouts in savings.

@Savvy_Sue - Oh yes, sorry, I did mean legal advise from an employment law solicitor.  Thanks so much for such helpful information.  I'll bear that in mind.

General_Grant

DoctorStrange said:

ESA and JSA are taxable, and Child benefit can be depending on the total income. 

https://www.gov.uk/income-tax/taxfree-and-taxable-state-benefits

Add up all the benefits she's received this tax year, add £40k to that and enter the numbers here:

https://www.uktaxcalculators.co.uk/#tax-calculation


That'll show you a good estimate and breakdown.

Depends - contribution-based ESA is taxable, income-related ESA isn't.  But OP will have seen that from the link we both posted.

househunt

Sorry, but I don't know whether it's income or contribution based ESA.

Also I hope you don't mind me asking as I could be totally wrong, but the way you guys have brilliantly explained seems to be a lot different from the solicitors website below, where PART THREE explains and breaks down the way tax is calculated on amounts over £30K.

https://www.monacosolicitors.co.uk/settlement-agreements/tax-implications/

General_Grant

househunt said:

Sorry, but I don't know whether it's income or contribution based ESA.

Also I hope you don't mind me asking as I could be totally wrong, but the way you guys have brilliantly explained seems to be a lot different from the solicitors website below, where PART THREE explains and breaks down the way tax is calculated on amounts over £30K.

https://www.monacosolicitors.co.uk/settlement-agreements/tax-implications/

That article is aimed at employers and what they should do.
We have been writing about what the eventual effect will be for your partner.

helptips

Hey househunt, sorry for jumping in on your thread, but since I had a similar question to what you've posted, I felt it easier to ask the experienced members on here.  If you have any problem with this, just let me know and I'll jump off and start a new thread.

So my situation is kinda similar.  Employer has recently been found guilty of discrimination and unfair dismissal.  They've put in an offer of £120k, which is ex-gratia and injury to feelings (on termination of employment).  Since I'm getting offered more than househunt, what formula do I use and what tax bands does it fit?  Am I in the 45% tax-band rate?

Cheers for any advice in advance