If you have signed a settlement agreement with your employer, you may be wondering whether you will need to pay tax on it. This can often depend on the terms of your settlement and what the money was paid out for.
In the UK, the first £30,000 of employment termination payments are usually tax free. However, this depends on if the payment qualifies for the exemption, e.g. compensation for loss of employment or redundancy. It is important to know that not every settlement qualifies under the £30,000 exemption. This could be affected by any outstanding salary, holiday pay, bonuses and wages which are usually subject to Tax and National Insurance.
Depending on the circumstances of your employment, if your settlement agreement includes compensation relating to a claim, then some or all of the payment may be included within the £30,000 exemption. Again, this will solely depend on the circumstances and how the payment has been outlined within the settlement agreement.
The £30,000 exemption is not a guaranteed to be a tax free allowance, and can depend on your individual settlement. Employers will more often calculate and deduct any payments for income tax and National Insurance which is due before making the payment.
When it comes to signing a settlement agreement, it is a good idea to go through the terms to understand exactly how much you will receive after tax. If you are unsure about any of the terms of your settlement, seeking independent legal advice or financial advice can help to make things clear and also help you to avoid any unexpected tax bills going forward.