Settlement Sums

This tax case asks whether the £30,000 tax free exemption on settlement agreement sums is applicable if the employee has already received redundancy pay?

Mr Moorthy, the Claimant, was made redundant by Jacobs Engineering Ltd. He received £10,000 in statutory redundancy pay but then bought unfair and age discrimination claims against Jacobs. The claims were settled via mediation and the Claimant signed a settlement agreement and received £200,000.00 as part of the deal.

What happened after the settlement sums?

Jacobs treated the first £30,000.00 of the settlement money as tax free, however, when the Claimant completed his tax return he had already received £10,000 in redundancy pay. Therefore HMRC, the Respondent, alleged the tax free amount of the settlement figure should only be £20,000.

The Claimant bought the case to Tax Tribunal and the Tax Tribunal rejected his claim as the injury to feeling in this settlement was not just related to a discrimination claim. The Claimant appealed but this was rejected as the Tax Tribunal held that injury to feelings did not fall in the exemption bracket.

This differs to the decision in a previous tax case, however, in this example the claim was solely in relation to a discrimination claim, not unfair dismissal. This issue is an example of how employers should be diligent when taxing exit packages and factor in whether they have already paid the employee any compensation, however this problem may have disappeared by April.