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Tax on Settlement Agreements

17 October 2014: It’s commonly known that a non-contractual payment of up to £30,000 can be made on termination under section 401-4 Income Tax (Earnings and Pensions) Act 2003 (‘ITEPA’). Contractual payments, and payments in lieu of holiday etc have to be taxed (See our web page).


There are occasions in which more than £30,000 may be payable without deductions under the Act. Section s406 ITEPA 2003 states that it will not apply to a payment or other benefit provided that it is paid on account of ’injury to, or disability of, an employee’ or death.


Especially when severance follows a disability discrimination claim, it may therefore be possible to rely on s406 to make payment in a tax efficient manner. However an employer contemplating such a payment would be wise to seek HMRC clearance in advance and have a robust tax indemnity clause just in case that is not effective.


We are employment solicitors specialising in employment law and settlement agreements based in central london. see or call 0207 118 0950.

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    Reculver Solicitors Ltd (Company No. 6910066)
    1st Floor, 330 High Holborn, London, WC1V 7QT.
    Tel: 0207 118 0950
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