Tax

There is no implied obligation on an employer to apportion a termination payment between taxable and non-taxable elements. An employer can legitimately treat the whole sum as taxable and leave it to the employee to sort out the position with HMRC if he or she believes it should be different.

Payments made by an employer under a compromise agreement or in full and final settlement of discrimination claims can be paid tax free. This is the case even where a large part of, or the entire compensation payment, is paid in respect of the discrimination element. But the payment must be in respect of the discrimination occurring before the termination and not in respect of anything following the termination, e.g. for loss of future earnings.

When making staff redundant, the question often arises as to whether any payments in lieu of notice (PILONs) can take advantage of the £30,000 exemption from income tax and NICs.