Tax overview
If you are wondering what are the tax implications of Compromise Agreements, this article should help to summarise the position. For a more in-depth view of tax and ex gratia payments, see our article on ex gratia payments. For a brief overview, read on.
Payment in lieu of holiday – if you have unused holidays and your employer decides to formally pay you in lieu of these, this payment would attract tax and NI as usual. If your employer is happy to be tax efficient however, then they can simply pay you an amount instead of holiday payment, and it can become part of your ex gratia payment.
Salary and benefits – payments made under your salary and benefits until the last day of your employment are subject to tax and NI.
Compensation and ex-gratia payments – these are generally exempt from tax for the first £30,000.00. Traditionally all compromise agreement contain a tax indemnity clause whereby you take responsibility for any tax which becomes due on these, but this is never relied upon in practice.
Pension schemes – payments that are made directly into the pension scheme on your behalf are not subject to tax. However, different pension schemes have their own annual and lifetime allowances and any payments made over the allowed amounts can be taxable – see our pensions [insert link] article for more detail.
Ex gratia payment exceeding £30,000 – if your Compromise Agreement includes compensation in excess of £30,000.00, the excess is subject to income tax and NI. To work out exactly how much tax would be applicable, see are detailed accounting article [insert link].
Legal fees – if we represent you, for example in exchange for a percentage of any increase obtained for you, then our fees can be paid directly by the employer, which means they are effectively tax-free for you.
If you have any questions on the tax implications of a Compromise Agreement or have any other questions, don’t hesitate to call us on 0800 533 5134, fill out the message box to the right hand side, or email info@compromiseagree.com
