Employment Law Newsletter

March 2018

Employment Law Newsletter

This is a gentle reminder of the tax changes  from 6 April 2018 that will have the potential to impact settlement agreements and should be known to employers who will be responsible for the tax in principle.

Tax relief – Settlements Agreements

Introduced by the Finance (No 2) Act 2017, from 6 April 2018 the government will tax ‘payment in lieu of notice’ and the scope of taxation on ‘injury to feelings’ has been widened.

Payments in lieu of notice (PILON) will from 6 April be classed as earnings and subject to tax and national insurance in the usual way. This is whether or not such a clause has been included in the employee’s contract of employment. This rule applies notwithstanding the fact that the first £30,000 is supposed to be tax free. In other words, the amendment is an indirect in road into the general rule that the first £30,000 is free from taxation; thus the statement will no longer be true in many settlement cases.

For example: let us assume Samantha is to be paid £30,000 as part of her settlement agreement. This represents 6 months’ salary. This includes a payment in lieu of notice of three months (£15,000). Under the old law Samantha would receive £30,000.

Under the new rules let us assume Samantha will pay tax of £40% on the sum of £15,000 because it is a payment in lieu of notice. Samantha is thus worse off by £6,000. Samantha would therefore receive £24,000.

Samantha is not going to be happy as she has to pay tax and will push for more money. The employer will be unhappy because their tax bill has been increased. The only winner in this situation is the tax man.

The above is a very simply example to get the message across. There is formulae to be used if the calculation has to be made properly.

Tax Relief – Injury to Feelings

Whether a person has been discriminated against pre-termination or post termination. The injury to feelings damages awards are subject to tax and national insurance except where the injury amounts to a recognised psychiatric injury. I feel that some lawyers might start to be creative here!

The current rule  (before 6 April 2018) was that there was no tax in relation to injury to feelings as a result of discrimination during work; however tax had to be paid on the injury to feeling award that related to termination of employment. This came about as a result of the case Moorthy v Revenue and Customs Commissioners [2016] UKUT 13 (TCC), [2016] All ER (D) 08 (Feb) which was decided by the Upper Tribunal. It was made clear that discriminatory payments for injury to feeling in relation to termination were subject to tax.

Foreign Service Relief

Foreign Service Relief for staff working and living aboard will no longer exist after 6 April 2018. Thus any termination payments will be exempt only up to £30,000. Thereafter any other payment will be subject to tax and national insurance in the usual way.


Increase in compensation payments

The statutory redundancy payment will increase to £508 per week on 6 April 2018 (previously £489).

The maximum compensatory award for any employees who issue claims unfair dismissal and their effected date of termination is on 6 April 2018 will be £83,682 (previous award £80,541).



Employers simply have to remember if there is a settlement agreement being agreed; tax will have to be paid for PILONS and/ injury to feelings.

Employees also need to remember to ask for the sum’s to be paid as gross to take account of the taxation that will need to be paid.