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Settlement Agreement and the £30,000.00 Tax Free Element

In the majority of Settlement Agreements there will be a number of different payments which typically make up the final amount an employee will receive.

These payments may include monies which should be taxed, for example unpaid holiday pay or payments in lieu of notice.

In addition, the Agreement will usually include a compensatory payment which, if correctly constructed, is Tax Free.

The difficulty arises when the parties seek to include Taxable payments within the “compensation payment” in order to seek to bolster the attractiveness of the Settlement Agreement. The compensation element is usually a payment for loss of employment rights. The compensation element must be for actual loss and care must be given to consider how this compensation element is calculated and made up. Statutory Redundancy will be Tax free, however, it is not uncommon to see an employer seek to include benefits which are clearly taxable and to shuffle those into the “compensation payment”.

This will cause problems for the employee who has no doubt given an indemnity as to Tax, including interest and penalties in the Agreement and after all it is the employee who is responsible for his/her own Tax position and completion of all relevant Returns.

Settlement Agreements may include a payment in lieu of notice. In the event that the Contract of Employment provides that the employer has the right to terminate the Contract of Employment without notice then that payment in lieu of notice is taxable.

It is not uncommon for employees to be given Gardening Leave during the period of their notice and as such, the pay received during this period is taxable in the normal way.

It is important to give proper consideration to the amounts that will be received in a Settlement Agreement, whether those are taxable or non-taxable, falling into the £30,000.00 exemption. In addition, because the employee is giving an indemnity it is important for careful consideration to be given to the nature and extent of the indemnity. Typically, an employer will want a wide-ranging indemnity, whereas the employee may consider that as the employer has access to an Accounts department, Cash office or Accountancy firm, that they should get their figures right and the indemnity should be quite limited.

Settlement Agreements are often very complex documents. The treatment of payments for Tax purposes and the Tax indemnity are just two of the issues which need very careful consideration and expert legal advice.

In the event that you need help and assistance in relation to a Settlement Agreement then please contact our Mr Andrew McCusker on Telephone: 02476 229 582, 01926 422 101 or by email:

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