Settlement Agreements have become a well-known option for employers and employees to resolve their differences without worry of future claims in return for a payment of some compensation.
For a while, settlement negotiations have included confusing discussions in relation to payment of tax on the compensation and other payments within the terms.
If there is no provision to pay in lieu of notice (PILON) or the employer chooses not to use this power when dismissing, they make a payment of “damages” for the breach which isn’t taxed.
If there is a provision to pay in lieu of notice or the usual notice is worked and paid such payment is pay and is subject to deductions.
The total compensation is tax-free up to £30,000.
As of April 2018
The PILON confusion will be over as all notice or PILON payments will be taxed regardless of terms in the contract –that’s anything that would have been earnings during the notice period.
The £30,000 tax-free threshold will remain.
But the amount over £30K will not only be taxed but it will also be subject to employer NI contributions for the first time.
Overall, whilst some confusion over tax may be removed, the incentive for employers to pay under a Settlement Agreement may be much lower due to these changes, as they increase the cost and reduce some employer bargaining power.
For advice on Settlement Agreements or any other aspect of employment law, contact Laura Franklin on 01782 205000 firstname.lastname@example.org or, for unlimited access to our expert employment lawyers, find out more about our Your HR service.