When a Settlement Agreement is entered into an employee can agree to waive their rights to bring a legal claim in return for a sum of compensation.

Generally, up to £30,000 paid as compensation under a Settlement Agreement can be paid tax free.  But not all payments made under a Settlement Agreement are tax free.

The Settlement Agreement must, therefore, make it very clear how the payment to the employee is calculated and which elements are taxable/non taxable.

Furthermore, although the employer will pay the tax, the employee could still be legally liable for any excess tax. The inclusion of a tax indemnity clause in a settlement agreement is very common.

It is essential that employees receive expert legal advice when entering into a Settlement Agreement.

Our fees will be paid by the employer so financial considerations should never prevent an employee from taking the best possible legal advice.

We are experts at aiMac-hr in Settlement Agreements and can also highlight associated tax issues.

We will scrutinise a Settlement Agreement and ensure that correct amount of tax payable by the employer is identified so that you, as an employee, are not faced with any “hidden surprises” later on.

There are, however, many examples of other payments that are commonly made following the termination of employment which may not be tax free and these can often include:

  • Salary and employment benefits
  • Payments in lieu of holiday or notice
  • Payments for ‘injury to feelings’
  • Payments for restrictive covenants or a confidentiality clause

In most cases, these types of payments will be subject to tax and/or national insurance and it is vitally important that the Settlement Agreement is worded correctly to prevent confusion and problems occurring after the document has been signed.

Get in touch with us so we can help you with your Settlement Agreement.