If you`re facing the end of your employment, receiving a settlement agreement can be a welcome relief. The terms of the agreement typically include severance pay, a reference, and an agreement not to pursue a claim against your employer. However, what you may not know is that settlement agreements, if structured correctly, can also be tax-free.
A settlement agreement is a legally binding contract between an employer and employee that typically includes a financial settlement. Under UK law, the first £30,000 of a settlement agreement can be tax-free. This means that you won`t have to pay any income tax or National Insurance contributions on this amount.
To ensure that your settlement agreement is tax-free, there are a few things that you need to consider. Firstly, the settlement agreement must be a genuine compensation payment. This means that it must be compensation for loss of employment, rather than payment for other things like bonuses or payments in lieu of notice.
Secondly, the settlement agreement must not include anything that would normally be taxed. This includes any payments in lieu of notice, as these would normally be subject to income tax and National Insurance contributions.
Thirdly, the settlement agreement must be in writing and signed by both parties. This is to ensure that there is no ambiguity over the terms of the agreement.
Finally, it is important to seek the advice of a specialist employment solicitor or accountant to ensure that your settlement agreement is structured correctly and that you are not paying more tax than necessary.
In conclusion, settlement agreements can be a tax-efficient way to end your employment. If structured correctly, you can receive up to £30,000 tax-free. However, it is important to seek professional advice to ensure that your settlement agreement is structured correctly and that you are not paying unnecessary tax.