Partner Article

Keep an employee quiet with £30,000 tax-free pay-off

Really? Well, yes and no. The problem with ‘golf club’ tax advice is sorting out the sound part from the invitation to an employment tribunal. Things may be getting even more complicated for employers now that ‘protected conversations’ and ‘settlement agreements’ have become part of the employment law wallpaper and ‘compromise agreements’ are a thing of the past.

Tangled up in the evolving web of exactly how employers can show employees the door are the tax issues. The Advisory, Conciliation and Arbitration Service has published a new Code of Practice on Settlement Agreements (currently awaiting ministerial approval) which explains the changes in employment law, but with no mention of tax. Employers who fail to check the tax and NICs consequences of their pay-offs could find it very costly if they’ve failed to take advice on this issue.

Contractual notice pay, accrued holiday pay, payments not to compete and the writing off of any loan from the employer are all examples of amounts that could fall into the taxable bracket and so never reach the safe haven of the £30,000 exemption or escape NICs liability. Termination payments can be free of tax up to £30,000 and wholly NIC-free, but only if the money can’t be taxed in some other way first. Trying to identify the elements that have gone into a termination payment may have got a little bit harder now that employers can have off-the-record, ‘protected conversations’ with departing employees. It is, therefore,as important as ever to consider tax and NICs effects when negotiating settlement agreements and when the facts are fresh in the parties’ minds.

This was posted in Bdaily's Members' News section by Baker Tilly .