In many instances a compromise agreement may contain provisions wherean employee may receive payment for loss of office which is more than the minimum amount as stipulated by the government that a holder of office is to by law.
A majory concern for many is the tax which the employee will be liabile for and this, in many ways this depends on whether the numerous components, that make up that compromise agreement payment is a payment by the employer in return for employment performed under your contract of employment. When contemplating the settlement amount in a compromise agreement, it is likely that a certain amount will become taxable, particularly if it is for a large amount.
So, for example, a payment by an employer in respect of notice that an employee is entitled to under a contract (written or oral) but where the employer does not ask the employee to work his or her notice (PILON), this element of the redundancy pay will be taxable because it is a contractual right of the employee to receive pay during his or her notice period.
Looking at this from another perspective, say an employer decides to compensate an employee for loss of office, if for example, this provides for a payment which is not due under the original employment contract, tax implications need to be considered.
In order to determine whether tax is due on the termination sum, a qualified legal advisor will check to see if it is a payment made under contract. HMRC will consider the payment as taxable if the contract or practice of the employer provides the employee a legal right to obtain a sum of money when employment is terminated.
Employment documentation will also provide clues to HMRC as to whether the settlement amount is taxable. An investigation may be made into the employee's contract of employment before coming to a decision. This may be a cause for concern to an employee because even if there is a reasonable expectation of a contractual right to a settlement sum, the government may still make a claim.
Up to £30,000 of a legitimate settlement sum is tax free. This is provided for in current government legislation. In order to receive the full tax allowance on £30,000, none of the the termination payment must be part of a contractual entitlement. All amounts, whether for services rendered or not, that exceed £30,000 is liable to tax at the employee's normal tax rate.
Click here for more details on compromise agreements:
Compromise agreements
A majory concern for many is the tax which the employee will be liabile for and this, in many ways this depends on whether the numerous components, that make up that compromise agreement payment is a payment by the employer in return for employment performed under your contract of employment. When contemplating the settlement amount in a compromise agreement, it is likely that a certain amount will become taxable, particularly if it is for a large amount.
So, for example, a payment by an employer in respect of notice that an employee is entitled to under a contract (written or oral) but where the employer does not ask the employee to work his or her notice (PILON), this element of the redundancy pay will be taxable because it is a contractual right of the employee to receive pay during his or her notice period.
Looking at this from another perspective, say an employer decides to compensate an employee for loss of office, if for example, this provides for a payment which is not due under the original employment contract, tax implications need to be considered.
In order to determine whether tax is due on the termination sum, a qualified legal advisor will check to see if it is a payment made under contract. HMRC will consider the payment as taxable if the contract or practice of the employer provides the employee a legal right to obtain a sum of money when employment is terminated.
Employment documentation will also provide clues to HMRC as to whether the settlement amount is taxable. An investigation may be made into the employee's contract of employment before coming to a decision. This may be a cause for concern to an employee because even if there is a reasonable expectation of a contractual right to a settlement sum, the government may still make a claim.
Up to £30,000 of a legitimate settlement sum is tax free. This is provided for in current government legislation. In order to receive the full tax allowance on £30,000, none of the the termination payment must be part of a contractual entitlement. All amounts, whether for services rendered or not, that exceed £30,000 is liable to tax at the employee's normal tax rate.
Click here for more details on compromise agreements:
Compromise agreements
