Taxation in Compromise Agreements

Taxation issues that could arise from any compromise agreement could be complex. More often, employees are full of questions about the kind of taxation schemes that could apply to any termination payment they receive from an employer. Is the payment from a compromise agreement taxable? If so, how much tax should be implemented?

The national rules over taxation of termination payments and redundancy packages as part of compromise agreements have been around for numerous years now. However, the HM Resources and Customs or HMRC is still receiving countless inquiries about taxation of these payments. Before you consider any compromise agreement offer from your employer, it would be appropriate if you would first know more about basic taxation rules applied on such documents.

In general, termination payments, whether a part of a compromise agreement or not, are free from any tax imposition if it is equal to or less than £30,000. Any amount that exceeds £30,000 would be subject to appropriate taxation, as mandated by the law. The policy covers contractual and statutory redundancy payments as well as termination payouts stated in the agreement. In a package, non-cash benefits provided to an employee as part of the compromise agreement (like a company car) would be computed using a cash value and would be subjected as well to taxation when applicable.

A payment made in lieu of notice is provided when appropriate termination notice has not been provided to compensate an employee for wages and benefits he/she could have received during the usual or normal notice period. If the employer pays notice payment in lieu or if the payment in lieu is contractual, it is considered taxable. If the employer agrees to pay you gross, he/she would logically insist to include a clause in the agreement that states your responsibility to shoulder any tax payable.

If overall value of a termination payout exceeds £30,000, you may ask for the tax relief on contributions for pension to be paid into your own occupational pension scheme, that is, if you have one. Check with your pension fund trustees if such a scheme is possible. You may also seek sound financial advice whether doing so would be appropriate in your own circumstance.

If taxation is properly imposed, the employer has the right to decide whether to deduct the amount directly from your termination payment before you receive it. It is the standard and usual practice. Thus, you need to know how much taxation to expect from your package. It is advisable that you ascertain this long before you sign any agreement offer from the employer.

Sound and reliable advice and guidance from an independent employment solicitor would truly be of great help. If you have taxation concerns related to a compromise agreement, you could also ask your solicitor about the appropriate and applicable tax schemes in the agreement as mandated by the law. This is why it is very important for you to hire only the best and most reliable solicitor for the purpose of providing you advice about the compromise agreement.