Tax implications of a Settlement Agreement

68ComebackSpecial

helptips said:

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

Impossible to say based on what you've given. Depending upon how much you've earned this year, and how much of this payment is taxable, you could be into the 45% band combined with losing your personal (tax free) allowance meaning that more would be taxed at 40% or 45%. If you lose your personal allowance this won't be picked up by HMRC until after the end of the tax year and you would likely owe them money.

helptips

Soz 68Comeback, I forgot to add that I've been on esa since start of tax year and up to now I've received just under £3000.  I also receive universal credit and pip, but having looked at the links doctorstrange provided, it seems the latter two are not taxable.  

68ComebackSpecial

You would also have to repay to HMRC any child benefit you have received in the current tax year as your taxable income would exceed £60k. 

helptips

68ComebackSpecial said:

You would also have to repay to HMRC any child benefit you have received in the current tax year as your taxable income would exceed £60k. 

I don't get any child benefit mate.  Only the benefits mentioned above.  Would I need to payback any universal credit or pip?

Assuming these are my circumstances, Am I right that to roughly work out the tax bands, it would be:

£120k, minus esa, universal credit and pip and then work out the remainder on 20%, 40% and 45%?  What about ni contributions?

househunt

helptips that's no issue for me if it helps you.  The members on here are very helpful, so your in safe hands.

helptips

Thanks househunt. 

I'm hoping someone will reply soon as I've not heard back as yet.   I'm more concerned about whether the 45% tax band would apply because that would knock off a massive chunk from whatever they've offered. Also whether I would additionally have to pay ni contributions too.

helptips

Can anyone please help me with answering the above questions?

Thanks.

Undervalued

helptips said:

Can anyone please help me with answering the above questions?

Thanks.

Given that amount you are talking about I would take professional advice from an accountant!

Meanwhile my understanding is as follows.....

Assuming the £120K is compensation for the loss of your job and not in any way a contractual entitlement (?) then the first £30K will be tax free regardless of your tax bracket. The rest will be taxed as income. If you have already earnt enough in this tax year (or will earn enough) to put you into the higher tax bracket then yes, as I understand it, you will pay 45% tax on £90K. I don't think (but I am not certain) that you will pay any National Insurance contributions on the £90K.

If however there is any kind of severance package (golden handshake) entitlement built in to your contract (which can sometime be the case with higher earners) then it is possible that the whole £120K may be taxable.

If the employer you are leaving deducts too much tax it can always be claimed back from HMRC for up to six years.

You do need professional advice. If this is a settlement agreement you must be advised by a solicitor for the agreement to be valid. For a fee they could no doubt arrange tax advice. 

Do not rely on strangers on the 'net with this sort of money involved.

68ComebackSpecial

helptips said:

Thanks househunt. 

I'm hoping someone will reply soon as I've not heard back as yet.   I'm more concerned about whether the 45% tax band would apply because that would knock off a massive chunk from whatever they've offered. Also whether I would additionally have to pay ni contributions too.

Additional rate tax (45%) is only payable on adjusted net income over £150k in a tax year. The greater issue is whether any part of the settlement will be deemed as non taxable as your personal allowance (the amount you can earn free of tax each year) is decreased by £1 for every £2 of income above £100k up to just over £125k, by which point your allowance will be zero. This reduction in allowance will not be taken into account in the tax deducted from your settlement but the additional tax would be due from you after the end of the tax year - you would need to complete a Self Assessment.

I did comment earlier that any child benefit received this year will definitely be repayable to HMRC (as your earnings will exceed £60k). Though you said that you don't receive CB it would still be repayable if your wife/ partner is in receipt of it.

Yes, this is all very complicated so, as suggested by Undervalued, you really do need to seek professional advice. Nobody here can give a definitive answer to your questions as we do not have the details of the agreement.

helptips

Hey @Undervalued and @68ComebackSpecial.  Soz for not replying sooner.  Been unwell with cough, cold and shivers for the last few days.  I thought it was covid, but thankfully it must have just been a nasty flu bug.

Cheers guys for the top advise.  I agree that it's not straight forward and should consult an accountant.  But here's a problem.  Solicitor says they only do legal advice and don't do any tax advice nor can they recommend anyone.

I contact a couple of accountants, but most don't know anything about settlement agreements.  Then I called another solicitor's firm.  They said they can do both legal and tax advice, but I'd need to move my case over to them.  I can't do that because it's being paid by my union and they won't allow it.  I'm stuck.

I don't mind paying, but does anyone know who can do calculations relating to settlement agreements?

Cheers