Section 401 ITEPA 2003 charges any payment received “directly or indirectly in consideration or in consequence of, or otherwise in connection with” the termination of employment. The first £30,000 is exempt (s.403); the excess is taxed as employment income, deducted at source, with employer Class 1A NIC but no employee NIC. Contractual payments and post-employment notice pay (ss.402A-402E) are earnings in full. A non-contractual payment for loss of office is not an emolument: Mairs v Haughey.
The net is wide, and the taxpayer carries the apportionment. A factual connection with the termination is enough, and settlement negotiations do not break it (Mathur v Revenue and Customs Commissioners). Settling claims that arise from a dismissal ties the whole payment to the termination; no close nexus is needed (Everson v Revenue and Customs Commissioners).
Injury to feelings. HMRC accepts (EIM12965) that compensation which “can reasonably be attributed solely to discrimination occurring before the termination” falls outside s.401, provided it stays proportionate to the Vento bands. Injured feelings connected with the termination are taxable: since 2018/19 s.406(2) provides that “injury” includes psychiatric injury but not injured feelings, reversing the earlier position considered in Moorthy v Revenue and Customs.
Psychiatric injury remains exempt under s.406(1)(b), but needs medical evidence; in Everson the exemption failed without it. On the old requirement that the injury prevent work, see Horner v Hasted (Inspector of Taxes) and Moorthy.
Confidentiality and non-disparagement. These are restrictive undertakings within s.225, and a payment for them is taxed in full with no £30,000 exemption. In Mrs A v Revenue and Customs a £1,055,000 harassment settlement was taxed that way. Agreements commonly allocate a nominal sum to the undertakings and state that no other part of the payment is made for them.
Legal costs. Section 413A exempts the claimant's legal costs incurred exclusively in connection with the termination, but only where the settlement agreement provides for the employer to pay them directly to the employee's lawyer; £400,000 was exempt on that footing in Mathur.
HMRC's own guidance is that “best practice is for the agreement itself to set out what each element of the termination payment relates to”. On grossing up tribunal awards, see Yorkshire Housing Ltd v Cuerden and British Transport Commission v Gourley.
Taxation of termination payments; the injury and disability exemption; s.406 ITEPA 2003 (formerly s.188(1)(a) ICTA 1988). The point decided in the High Court was the meaning of 'disability' in the exemption, on which the taxpayer failed. The Special Commissioner's view that 'injury' meant a medical condition preventing the employee from working was obiter and does not appear to have been endorsed by Lightman J; the Court of Appeal in Moorthy v Revenue and Customs [2018] EWCA Civ 847 found no warrant for the assumption that the disability or injury must prevent the person working [64]. The case was not cited in Orthet Ltd v Vince-Cain, which treated injury to feelings awards as exempt; the EAT in Timothy James Consulting Ltd v Wilton distinguished it as concerning disability rather than injury. [Summary checked against a practitioner text, not the judgment.]
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References found in the judgments’ text, with the number of paragraphs in which each case is mentioned. Not a classification: how a case was treated is recorded under Later history.
Tax treatment of injury-to-feelings payments connected with termination; s.401 and s.406 ITEPA 2003. The whole of a £200,000 settlement of unfair dismissal and age discrimination claims fell within s.401(1)(a) as a payment received in connection with the termination of employment [1], [45]. Injury in s.406 is undefined and bears its ordinary meaning [58]: a payment for injured feelings in respect of actionable age discrimination fell within the exemption [79]. The court expressed no view on payments for injury to feelings where no statutory basis for the claim could exist [80]. The appeal was allowed on the exemption issue and £30,000 of the payment declared exempt [87]. The court noted that s.5(7) Finance (No 2) Act 2017 amended s.406 from 2018/19, so that the exemption will for the future exclude payments on account of injured feelings [80].
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Cites
References found in the judgments’ text, with the number of paragraphs in which each case is mentioned. Not a classification: how a case was treated is recorded under Later history.
Settlement agreements; tax; restrictive undertakings; s.225 ITEPA 2003. A settlement agreement paid the taxpayer a Compensation Sum of £1,055,000; she withdrew her tribunal claim, waived other claims and accepted confidentiality and non-disclosure obligations [2]-[3]. She argued the sum was wholly consideration for those obligations and outside any charge to tax [5]. The FTT held that s.225 covers any undertaking restricting an individual's conduct or activities, whether related to employment or personal life, which is given in connection with the employment [57]. The sum was paid in respect of her undertaking not to make or pursue claims and was chargeable as earnings under s.225(3) [63]. If that was wrong, it was received in connection with the termination and taxable under s.403 above £30,000 [69]. The sum could not be apportioned [70]. Appeal dismissed [8].
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References found in the judgments’ text, with the number of paragraphs in which each case is mentioned. Not a classification: how a case was treated is recorded under Later history.
Taxation of an ET settlement; ss.401, 403, 406 and 225 ITEPA 2003. A payment of £183,750 settling unfair dismissal and disability discrimination claims after a redundancy dismissal comprised £21,288.42 redundancy pay and £162,461.58 under the settlement agreement. HMRC's closure notice treated £18,000 as non-taxable compensation for injury to feelings from pre-termination discrimination and the remaining £165,750 as a termination payment within s.401, taxable above the £30,000 threshold, most of which the redundancy payment had already absorbed, leaving £8,711.58 [3], [92], [97]. The FTT agreed: applying Moorthy, the only question is whether the payment was received directly or indirectly in consideration or in consequence of, or otherwise in connection with, the termination; no close nexus is required and Oti-Obihara was wrongly decided [103], [107], [181]. The s.406 exemption for payments 'on account of disability' was refused, applying Horner v Hasted: the taxpayer's disability discrimination claim did not make the settlement a payment on account of his disability. To the extent the sum was paid for confidentiality and non-disparagement it was in any event taxable under s.225 as a restrictive undertaking [178]-[179]. The taxpayer bears the burden of any apportionment [6].
Cites
References found in the judgments’ text, with the number of paragraphs in which each case is mentioned. Not a classification: how a case was treated is recorded under Later history.