The Team

Taxation Changes in Settlement Agreements
31/03/2018
Taxation Changes in Settlement Agreements
6th April 2018 will see a change in tax treatment of payments made under a Settlement Agreement on termination of employment. 

A Settlement Agreement is frequently used by employers to bring an employment contract to an end on a "managed" basis. You will find that these types of agreement are often used in redundancy situations. The Settlement Agreement will set out the terms and conditions on which an employee's employment is terminated. It will contain details of payments due and to be made to the employee and, from the employee's perspective, will include clauses preventing the employee making application to an employment tribunal in respect of the termination of his or her employment.

A significant part of the Settlement Agreement is the calculation of sums due to the employee as a result of the termination and which aspects of this are taxable.

The UK Government has clarified the position in respect of payments in lieu of notice in Section 5 of the Finance (No. 2) Act 2017.  What this now means is that from 6th April 2018, any post-employment payments in lieu of notice will now be subject to Income Tax and National Insurance contributions. It is also common for these agreements to include other payments that are not otherwise subject to tax. These are non-contractual or ex-gratia payments that the employer decides to make or negotiates with the employee that are not contained in the employee's contract of employment. There is a ceiling of £30,000 within which no Income Tax or National Insurance contributions will be payable. In the past, sometimes, the payment in lieu of notice was included in this "tax free" sum. The latest legislation makes it clear that this is now disallowed and any post-employment payment in lieu of notice is now subject to Income Tax and National Insurance contributions.