Posted by Lauren Harkin, Partner
Tax now payable on injury to feelings awards
Whether as a result of protected conversations, disciplinary or capability processes, grievances or tribunal proceedings, as an employer you may find yourself engaged in ‘negotiations to settle’ with current or former employees. Employees may allege that they have suffered an “injury to feelings” as a result of what they see as unlawful treatment, and settlement monies may be apportioned between financial losses, legal fees, and pre- and post-termination injury to feelings, to take advantage of the tax rules.
A recent decision of the specialist tax Upper Tribunal has recently decided that awards of injury to feelings are taxable, a reverse of previous policy.
The Upper Tribunal’s reasoning rests on the wording of s.406 Income Tax (Earnings & Pensions) Act 2002, which states that a payment in respect of a medical condition “that results in the termination of employment…” is not taxable. In this case, the injury to feelings suffered by the employee, although genuine, did not result in termination of employment. There is also a question as to whether injury to feelings amounts to a medical condition. The result – injury to feelings awards are now taxable.
What does this mean?
Employees will now have to pay tax on an injury to feelings award. Tribunals will therefore ’gross up’ the award, meaning employers will pay an increased sum to account for tax due. This could mean that if the injury is assessed or agreed at a value of, say, £10,000, employees will seek up to £16,000 to receive a ‘net of tax’ payment of £10,000. This will also have an impact on negotiations, with employees seeking a grossed-up award.
Our advice is therefore to make clear in negotiations that any offer made includes tax due, and to budget for the possibility of a tax uplift in any award or settlement.
If you would like to discuss awards in settlement negotiations, or any other employment law matter, please get in touch with our specialist Employment & HR team.
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