My client has received a compromise agreement payout.
Figures for example only:
"Payment in lieu of 1 months notice £1000 gross
Ex gratis bonus 1.5 months salary £1500 gross
Payment for accrued annual leave 5 days £500 taxable "
My question is: the two amounts paid gross - do these need to be declared as income and taxed as part of annual income? Are they taxable? Or are they paid gross because they are tax free?
Replies (5)
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Depends ...
on the terms of the contract, That fact that it is done by compromise doesn't necessarily change the tax status if what is being paid is other respects contractual.
So, is there a PILON provision in the contract? If yes, then the £1,000 is taxable. The ex-gratia bonus would appear at face value to be non contractual and therefore tax free.
Tax free items would not be included in the tax return provided they do not exceed the £30,000 limit which is clearly not the case here.
Slight concern
Is the ex-gratia bonus the way it's described in the compromise agreement? Or is that your term to describe the compromise settlement figure.
Any payment, contractual or not, that is reward for services is taxable. "Bonuses" are usually a reward for service, even though they might be paid gratuitously.
I agree that the PILON will be taxable if (and only if) there was an explicit term in the contract indicating that payment would be made in lieu of notice, or if it was implied into the contract by a notorious custom.
If either of the payments were taxable though, the obligation was on the employer to deduct tax.
Yes, but ...
If either of the payments were taxable though, the obligation was on the employer to deduct tax.
That may be so, but it does not relieve the taxpayer of the responsibility to disclose them on his tax return if they are indeed taxable.