Tax on settlement payment

Settle23

Hi

I have recently taken a settlement from my company.

I know tax and NI is paid on the PILON and outstanding holiday pay which is fine.

However I also received an additional payment as compensation for my termination and my old company are saying that tax and NI have to be paid on the full amount of that as well but as far as I can tell the first £30k should be tax free. When I said that to them they claim that is only for redundancy payments and doesn't apply here - is that correct?

Thanks

400ixl

That is correct that the first £30k of a redundancy payment is tax free. For it to be classed as a redundancy payment there are criteria that need to be met such as the role is being displaced.

If you were terminated for some other reason and came to a settlement of a payment where it was not by terms of redundancy, then I believe it is fully taxable.

That has certainly been the case for people I have known whose face no longer fitted in the role they were doing, but they had not committed any sackable offence and the roles was still needed and they would recruit someone else into it. They were essentially paid off and their pay off was all taxable.

KP20

A termination compensation payment can also be tax free, in the same way that the first £30K of redundancy is, depending on what it covers.

Some more information here: https://www.lewissilkin.com/en/insights/frequently-asked-questions-on-termination-payments

I would ask your employer to send you information about why they believe it is taxable (eg. did they get legal advice?), which you can potentially dispute, rather than the other way aorund. 

Settle23

Thanks. 

It's compensation for termination so yes it should fit under the tax free for the first £30k heading in your link. 

They seem to be just going off the gov.uk page which I can't link to here yet. 

That is a little vague compared to your link but it does say you wouldn't usually pay tax on the first £30k of additional severance pay which I think this would fall under. 

KP20

I also read the gov.uk link as I thought that would be a better one to send to your employer, and came away similarly confused. However, given that I have done many settlements in my time, I am confident to say that if it is a payment to compensate for your loss of employment then it should be fine to be tax free.