A tricky question regarding the tax treatment of different types
of termination payments has been considered recently by the Upper
Tribunal.
Employees who have suffered discrimination either during
employment or on termination can seek compensation for loss of
employment. Many also seek compensation for injury to their
feelings. A recent tax Tribunal case has addressed how and when
such payments may be taxable.
The default position is that payments related to the termination
of employment will be taxable. However, the first £30,000 of
such a payment is generally free of income tax provided that it is
not something to which the employee was contractually entitled. Any
excess compensation over £30,000 is taxable, unless it falls
within a category of specific exemptions.
