Settlement agreements typically include a payment from an employer to an employee. The full sum of money received in a settlement agreement may be made up of separate amounts, paid for different reasons. Therefore there may be tax or national insurance implications, but likewise, the full amount could be paid tax free.

Don't worry if this sounds complicated, often the first £30,000 of the settlement agreement payment is tax free. Our handy guide to settlement agreement tax implications should help you, or please get in touch for expert advice on your settlement agreement. 

Notice Pay or Salary up until Date of Termination 

If you receive your regular salary up to the date of the termination of your employment, then this will be subject to tax and national insurance at your usual rate. The same applies to any taxable benefits that you receive up until the date your employment ends.

Payments due to Redundancy

If you are being made redundant, then any statutory or contractual redundancy payments come under the £30,000 tax exemption. If your redundancy payment is over £30,000 then you will pay tax on any sum over that. 

Payments in Lieu of Holiday Entitlement 

It may well be the case that you will have holiday owing to you when your employment ends, which you are legally entitled to be paid for. Any payments as part of a Settlement Agreement made in lieu of holiday are taxable at your normal rate. 

Payments in Lieu of Notice (PILON) 

You may receive pay in lieu of notice, (PILON). This can happen in the case that an employee is dismissed and receives a payment instead of working their notice period. PILON will usually be the same amount you would have been paid if you had worked your notice period and will be subject to the usual Income Tax and National Insurance contributions.

Ex Gratia or Compensatory Payments

Ex gratia payments are a made as compensatory measure to help with the effects of loss of employment. It is an agreement made outside of your employment contract and will be detailed in a settlement agreement. For example, it would not include your notice or holiday pay which you are legally entitled to. Ex gratia or compensatory payments are exempt from tax on the first £30,000.

Compensation for Injury to Feelings

In some cases, and often if employment termination has been deemed as unfair dismissal, compensation for injury to feelings payment can be made. 

This will arise from winning a discrimination claim, and the tribunal can award compensation for injury to feelings and for financial losses. Any payment received for injury to feelings will not be taxable up to the £30,000 tax exemption.

Contributions to Pension Scheme

Any payments made into a pension scheme by you or your employer are separate from any settlement agreement payout and are not subject to tax. There are specific allowances for contributions to registered pension schemes and do not fall under the £30,000 tax exemption.

Legal costs for a Settlement Agreement 

Typically, the employer pays for any legal costs encored in obtaining a settlement agreement. This amount of money will not count towards the £30,000 tax exemption but should be paid directly to your solicitor to ensure this is the case. 

Do you have questions regarding tax implications of your settlement agreement? 

Consulting the services of a specialist settlement agreement solicitor can really help to minimise confusion and make the most of your settlement figure. 

Settlement Agreement Services of Swindon are proud to provide a friendly, reliable service for anyone facing job termination for whatever reason. Please get in touch with us to discuss your individual situation. We would be very happy to help you understand how your settlement agreement will be affected by tax.