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TERMINATION PAYMENTS: A taxing issue for employers

04 March 2016  

Mark Kaye and Charlie Bowden examine the impact of a recent Upper Tribunal decision on the tax treatment of payments for injury to feelings

The news in July 2015 that the government was consulting on simplifying the tax and National Insurance Contributions (NICs) treatment of termination payments was welcomed by tax and employment practitioners alike. As the case law from both the tax and employment tribunals has shown, this is currently an area of the law riddled with inconsistency. Buried within the mire of uncertainty has been the taxation treatment of payments made for injury to feelings arising from discrimination. Thankfully, the Upper Tribunal case of Moorthy v HMRC [2016] has brought some clarity – if not finality – to the tax treatment of termination payments. In summary, any compensation received in connection with the termination of employment, beyond the £30,000 exemption, is subject to the usual deductions for income tax. Where the compensation is for discrimination that is not connected to the termination, it can be paid tax free.


Additional Info

  • Case(s) Referenced:

    Horner v Hasted [1995] STC 766

    Moorthy v HMRC [2016] UKUT 13

    Orthet v Vince Cain [2004] UKEAT 0801/03

    Oti-Obihara v HMRC [2010] UKFTT 568 (TC)

    Timothy James Consulting Ltd v Wilson [2015] UKEAT 0082/14

    Vento v Chief Constable in West Yorkshire [2002] EWCA Civ 1871

    Walker v Adams [2003] SPC 344

Last modified on 07 March 2016