It is preferable that every element of an employer exit payment be broken down into the settlement agreement. While HMRC is willing to ask questions to determine which elements of a lump sum payment are tax-exempt, if so, it is much easier if they do not need it. If the employer wishes to introduce a confidentiality clause or a restrictive contract as part of the transaction contract, a sum of money called „consideration“ must be paid to the worker in order for the clause to be binding. As a general rule, it is a small fee, but subject to tax and subject in the usual way to national insurance. Normally, transaction agreements are used when the employment comes to an end, and the basic rule is that the first $30,000 can be paid tax-free. For example, Imagine that you were fired from Lloyds Bank and you received a payment of $25,000 in a transaction contract, then you got a job with Scottish Widows, but you were laid off some time later, and you received compensation of $15,000. Both payments must be aggregated before the $30,000 limit is applied, since Lloyds Bank and Scottish Widows are both controlled by Lloyds Banking Group. If you already have such conditions in your employment contract, these are usually included in your transaction contract. But sometimes an employer wants to revise them or add new ones, and to be legally binding, they have to pay you to agree and stick to them. Although the amounts paid to you are invariably modest, they are nevertheless subject to income tax (as well as national insurance contributions). The tax impact of compensation is discussed in this article in two main parts: the first relates to payments that may be tax-exempt and the second is taxable payments.
In the third and final part, we explain how an „ex gratia“ payment of more than $30,000 is taxed in a transaction contract, and we illustrate how the tax is calculated. Some transaction agreements may also have a small consideration to make a confidentiality clause mandatory, and this too will be taxable. If a transaction contract offers compensation of more than $30,000, the surplus is taxed at your appropriate marginal rate. Compensation is not revenue for NIC purposes and is fully exempt from NIC, even if it exceeds $30,000. The typical type of payments that may be tax-exempt under a transaction agreement relates to payments that are made as a result of discriminatory claims for any reason, but generally discrimination on the basis of sex, race or disability.