Uk Compromise Agreements A And Tax

If you​ have been offered a​ Compromise Agreement to​ terminate your employment,​ you​ must ensure that your solicitor understands how payments will be taxed. Often the​ agreement can be worded differently to​ save you​ money. in​ this article,​ Andrew Crisp,​ an​ employment law solicitor,​ explains how it​ works.
the​ basic position is​ that compensation for loss of​ employment is​ not taxable up to​ a​ maximum of​ £30,​000.00. This includes any redundancy payment.
Any payments due under an​ employment contract are taxable. This will include salary up to​ the​ date of​ termination,​ payment for accrued but untaken holiday as​ well as​ bonus and commission payments.
But what happens when the​ Compromise Agreement provides that the​ employee will receive a​ sum of​ money instead of​ working a​ notice period? This is​ known as​ a​ Payment in​ Lieu of​ Notice (PILON).
if​ the​ employee works the​ notice period,​ the​ salary is​ taxed in​ the​ normal way.  Unfortunately,​ the​ position is​ less clear with a​ PILON. is​ it​ taxable as​ a​ payment under the​ employment contract or​ is​ it​ a​ tax free compensation payment for loss of​ employment?
the​ issue is​ determined by whether or​ not there is​ a​ clause in​ the​ employment contract allowing the​ employer to​ make such a​ payment,​ known as​ a​ PILON clause. 
if​ there is​ no PILON clause in​ the​ employment contract,​ the​ position is​ straightforward. Any PILON in​ the​ Compromise Agreement is​ not classed as​ a​ payment under the​ employment contract.  the​ employer is​ deemed to​ be breaking the​ employment contract by not allowing the​ employee to​ work his notice.  the​ payment is​ classed as​ compensation for breach of​ the​ employment contract and can be paid tax free up to​ £30,​000.00. 
the​ position is​ different if​ the​ employment contract does contain a​ clause allowing the​ employer to​ make a​ PILON.  if​ an​ employer has a​ discretionary right to​ make a​ PILON and chooses to​ do so,​ the​ payment will be subject to​ tax.  it​ is​ deemed to​ be a​ payment made under the​ employment contract.
if​ however the​ employment contract gives the​ employer the​ discretion to​ make a​ PILON but the​ employer chooses not to​ do so and pays compensation instead,​ it​ may still be deemed to​ be taxable as​ a​ PILON.  This is​ more likely when the​ compensation payment is​ substantially the​ same value as​ a​ PILON would have been.
Compromise Agreements often state unnecessarily that tax will be deducted from the​ PILON. When you​ choose a​ solicitor to​ advise on​ your Compromise Agreement,​ you​ must ensure that they are fully familiar with the​ way that termination payments will be treated for tax. it​ may be that,​ with a​ bit of​ re-wording,​ you​ could save thousands of​ pounds!

Uk Compromise Agreements A And Tax Uk Compromise Agreements A And Tax Reviewed by Henda Yesti on July 05, 2018 Rating: 5

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