Case Underlines Tax Pitfalls of Leaving Employment

In an important case which illustrates the financial pitfalls of leaving employment, a senior worker who received £200,000 in settlement of age discrimination and unfair dismissal claims has been landed with an unwelcome income tax bill.

The man, aged in his 60s, was a long-serving executive director of an engineering company but was made redundant from his £111,000-a-year job after failing to achieve promotion to vice-president. He received statutory redundancy pay of £10,640 but subsequently launched proceedings before an Employment Tribunal.

Those proceedings were settled by his former employers for £200,000. The payment was made without any admission of liability and was expressed to be ‘ex gratia’ and ‘by way of compensation for loss of office and employment’. The man nevertheless argued that the money should be viewed as compensation for discrimination and injured feelings and was thus not taxable.

In dismissing his appeal, however, the First-tier Tribunal (FTT) ruled that the entirety of the £200,000 was paid ‘directly or indirectly in consideration or in consequence of, or otherwise in connection with’ his employment. The link between the payment and the termination of his employment was incontrovertible.

The FTT acknowledged that its ruling ‘may appear harsh’ – particularly because the man would have paid less tax had he not challenged HM Revenue and Customs’ more generous assessment. However, after taking into account the limited exemption that applies to redundancy pay, the FTT found that £180,640 of the sum was taxable under Section 401 of the Income Tax (Earnings and Pensions) Act 2003.