Taxable termination payment – tribunal case
A recent tribunal case examined the tax status of a termination payment and concluded it was taxable.
The taxpayer, who argued her own case, accepted a permanent offer of employment and commenced employment on 17 January 2005. Her employment was governed by a signed employment contract which included a 3 month probation period with a one week notice of termination clause. Prior to the end of the probation period the taxpayer was notified in writing that following a business efficiency review her role was at risk of redundancy. She was asked to clear her desk and go home but continued to be paid for a further two week period until 27 April 2005.
On this date, the taxpayer had a meeting with her employers and was handed a draft compromise agreement which included a statement that the taxpayer believed she may have claims against her Employer for holiday pay and for breach of contract.
A ‘settlement payment’ was agreed in full and final settlement of the complaints indicated above and against a generic list of possible employment-related claims. A payment of almost £18,000 was made to the taxpayer before deductions for tax and national insurance contributions.
The taxpayer argued that the payment was not taxable as it was a payment below the £30,000 threshold as a payment on termination of employment. The tribunal dismissed the appeal finding that there had been no breach of employment and that the payment was a payment in lieu of notice for that three-month period.