Settlement Agreement Tax Free Sum

A settlement agreement tax free sum, also known as a termination payment, is a payment made to employees when their employment is terminated without going through a tribunal. The purpose of settlement agreements is to resolve employment disputes quickly and with minimal cost to both the employer and employee.

However, many employees are confused about whether the settlement agreement tax free sum is subject to tax or not. In this article, we will explain what a settlement agreement tax free sum is, and whether it is taxable.

What is a Settlement Agreement Tax Free Sum?

A settlement agreement tax free sum is a payment an employer makes to an employee when their employment is terminated. This payment is made to compensate the employee for the loss of their job and to settle any claims or disputes between the employer and employee.

The payment can include various components, such as salary and benefits, holiday pay, and a tax-free sum of up to £30,000. The amount of the tax-free sum will depend on the individual circumstances of the case.

Is a Settlement Agreement Tax Free Sum Taxable?

In general, the first £30,000 of a settlement agreement tax free sum is tax-free. However, any amount over £30,000 will be subject to income tax and National Insurance Contributions (NICs).

It is important to note that if the sum is paid as compensation for „injury to feelings“ or as part of a discrimination claim, the tax rules may differ. HM Revenue and Customs (HMRC) may consider these types of payments as taxable income.

Before signing a settlement agreement, it is crucial to seek advice from a qualified professional, such as an employment lawyer or tax adviser, to ensure that you understand the tax implications of the payment.

Conclusion

A settlement agreement tax free sum is a payment made to employees when their employment is terminated to settle any claims or disputes between the employer and employee. The first £30,000 of the sum is tax-free, but any amount over £30,000 will be subject to income tax and National Insurance Contributions (NICs).

It is important to seek professional advice before signing a settlement agreement to ensure that you understand the tax implications of the payment. By doing so, you can ensure that you make an informed decision and receive the most beneficial outcome.