How to Minimise Tax Liability from a Settlement Agreement
07 April 2016
If you are negotiating an employment Settlement Agreement in England or Wales, you may face tax implications but by getting advice from a specialist Employment Law Solicitor, you can limit those liabilities to try to achieve a better outcome.
Your employer has the opportunity to pay the first £30,000 compensation tax free, but some elements of the Settlement Agreement could be subject to tax. So which elements carry a tax liability and what can you do to minimise the amount of tax you pay?
You cam't limit your exposure to Income Tax or National Insurance Contributions (NIC) on any salary or benefits paid up to the end of your contract – this includes any payments made in lieu of holiday and possibly even payment in lieu of notice. Where this is stipulated in a contract or policy as payable to you as an employee, you will have to pay Income Tax and NIC on this amount. You would usually pay tax on this amount so just because this amount is included in a settlement agreement does not exclude any tax liabilities.
In addition, if there is a Restrictive Convent (a clause to stop you working for a competitor once you finish your contract) in your contract of employment that is too wide to be enforceable, or if there was no restrictive covenant in your existing contract, your employer can introduce one in the settlement agreement.
If this is included in the settlement agreement, your employer should normally pay a consideration amount as this would make it legally binding. This is subject to Income Tax and National Insurance payments. You may also have a confidentiality clause in your settlement agreement and any consideration paid for this clause is also subject to Income Tax and National Insurance.
Non Contractual Payments
Any amount that is non contractual and is agreed in a settlement agreement will be tax free on the first £30,000. This includes payments for:
- loss of employment
- payment for injury to feelings
- payment for a disability or injury
- redundancy – both statutory and contractual amounts
Any amount payable over £30,000 will be taxed at a rate of between 20% and 45% depending on the amount.
The cost of legal advice on your settlement agreement should be paid directly by your employer and therefore should not be included in the £30,000 tax free amount. You should ensure that the settlement agreement is written to show a specific clause that your employer will pay this amount directly to the Solicitor of your choice, and that it is only in respect of the termination of your employment.
Also, if you have agreed a clause in your settlement agreement that allows you to attend external training sessions or business coaching, you should ensure that your employer pays these directly to the provider so this amount is not included in your tax free amount.
The structure of your settlement agreement is important so that you can minimise the tax liabilities you face and an Employment Law Solicitor who has experience in negotiating and reviewing settlement agreements, can help you to clarify some of the points in the agreement and offer advice on how the agreement could be structured to reduce your tax liabilities.
Fixed Solicitor Fees
For legal advice on the meaning of the terms in your settlement agreement (without any financial negotiations and without advice on the merits of any Employment Tribunal claims) we offer competitive fixed fees. Your employer will usually pay these legal costs.
If you're not sure whether you are getting enough compensation as part of the settlement agreement, we can offer you strategic advice on your options for a fixed fee. This will usually be payable by you.
After receiving our strategic advice on your options, you may decide that you want us to try and negotiate a better offer from your employer.
Once we have provided you with a written quote for the agreed work to be done, that price will not change.
This takes all the uncertainty and worry out of making the settlement agreement and ensures that you can achieve the best possible outcome.