Kate Brooks
Partner, Solicitor & Head of Employment/HR Services
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Date Published:12 May 2017 Last Updated:13 Apr 2021

Are payments under settlement agreements tax free?

Employment Law Advice

Wage payments made on the termination of employment should be subject to deductions of tax at source in the normal way. Wage payments include any salary, bonus/commission, and payments in respect of outstanding holiday.

The first £30,000 of any redundancy, termination, compensation, discretionary or ex gratia payment can be paid tax free.

Notice pay should usually have tax deducted at source unless an employee receives a payment in lieu of notice and there is no contractual entitlement to that notice period. This means that if the contract does include a payment in lieu of notice clause and the employer does not make a habit of paying in lieu of notice then a payment in lieu of notice can be paid tax free (subject to the £30,000 cap). This is good for the employee and employer. The employee receives the gross (amount before tax) and the employer does not have to make employer National Insurance contributions so also saves money.

If you have been given a settlement agreement and require advice on the terms or how to negotiate, do not hesitate to contact me on 01202 057754 or kate.brooks@ellisjones.co.uk.