The compensation payment is the amount the employer pays the employee for loss of office or loss of employment. Where the parties enter into a settlement agreement the employer pays this extra, or ex-gratia, payment in return for the employee’s undertaking not to sue the employer.
The compensation payment is taxed subject to an exemption on the first £30,000. Another way to consider this, is that the first £30,000 of the compensation payment can be made without deduction of tax.
However, if when the employer terminates employees it routinely pays a compensation payment (of the sort ‘two weeks’ salary for each year worked’), then the compensation payment may be taxed in full.
The £30,000 exemption will cover not only compensation payments, but statutory and enhanced redundancy payments.
Other elements of the termination package are taxed differently:
The financial package that the employer pays to the employee on termination of employment comprises different elements. It includes, but is not necessarily limited to, the compensation payment. Tax treatment is different for each component of the overall package.:
When are they used? What is in them? Use our guide to understand more about settlement agreements
Depends on a variety of factors. We will advise about the particulars of your situation and explain how much compensation is appropriate
Is a settlement agreement offered when employees are redundant? Find out more on our redundancy pages
We seek to address your legal needs in a way that suits you. For certain matters we can offer a fixed fee arrangement. Learn more about costs with Aeon settlements
Discover more about the terms that the employer will include in the settlement agreement.