Are Compromise Agreement Payments Taxable?
When an employment relationship comes to an end, both the employee and the employer may decide to enter into a compromise agreement. A compromise agreement is a legally binding agreement which sets out the terms of settlement between both parties, often providing financial compensation in exchange for the employee waiving their right to certain legal claims against the employer.
One of the most common questions that arises when it comes to compromise agreements is whether the payments received are taxable. The answer isn`t always straightforward, as it depends on the nature of the payments made.
Let`s take a closer look at the different types of payments that may be included in a compromise agreement and whether they are taxable.
Statutory Redundancy Pay
If a compromise agreement includes a payment for statutory redundancy pay, this payment is normally tax-free up to a certain limit. This limit is determined by the employee`s age, length of service, and weekly pay, and any payment above this limit will be taxed at the employee`s marginal rate.
Ex-Gratia Payment
An ex-gratia payment is a voluntary payment made by an employer to an employee, which is not legally required. This type of payment can be included in a compromise agreement as part of a settlement and will be taxable. However, the first £30,000 of any ex-gratia payment is tax-free, as long as it is not given in recognition of work done or to be done.
Notice Pay
Notice pay is the amount an employee would have been paid for the length of their notice period had they not been made redundant. This payment is taxable as it is considered to be earnings and will attract both income tax and National Insurance contributions.
Pension Contributions
If an employer agrees to make a contribution to an employee`s pension fund as part of a compromise agreement, this payment will not be subject to income tax or National Insurance contributions. However, this payment is subject to annual and lifetime pension allowances, so it`s important to seek advice from a financial advisor to understand the implications.
Conclusion
In summary, the tax treatment of payments made under a compromise agreement depends on the nature of the payment and the circumstances. Some payments may be tax-free, while others are subject to income tax and National Insurance contributions. It`s important to seek advice from a qualified tax professional to fully understand the implications of any compromise agreement payments.