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Will I have to pay tax on the sums I am paid under the settlement agreement?
The short answer is that you will need to pay tax on some of the payments made under a settlement agreement but you will not need to pay tax on certain sums.
You will normally need to pay tax on the following sums:
Your notice pay (whether you’re being paid in lieu for your notice pay, you work your notice out, or you’re placed on garden leave);
Bonus payments; and
Any other payments that you’re contractually owed by your employer
You will not normally have to pay tax (or National Insurance contributions) on payments made as compensation for the termination of your employment (also known as ‘ex-gratia payments’) up to a total sum of £30,000. Any compensation paid over £30,000 will normally be subject to tax (but not National Insurance).
Payments made as compensation for injury to feelings are generally also not taxable (if the injury to your feelings relates to a detriment that you suffered prior to your dismissal).
Equally, payments made on account of a disability are also normally free of tax and national insurance.
Redmans Limited is a company registered in England and Wales with registration number 05872980, VAT GB893856068, and registered office Parkshot House, 5 Kew Road, Richmond, TW9 2PR. Settlement Agreement Lawyer is a firm of solicitors authorized and regulated by the Solicitors Regulation Authority (SRA number: 468098).