Termination payments

£30k ex-gratia and total taxable income

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Hi All, 

can't find any confirmation whether tax-free £30k allowance for ex-gratia payments count or don't count towards total taxable income for the year, i.e. if someone gets £130k (including £30k ex-gratia), will other employment income in 2024/25 be taxed at 45% or there will still be 40% bracket available? 

thanks,

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By FactChecker
23rd Apr 2024 16:00

There's a lot left unspoken (and so unclear regarding the scenario) here:

1. "tax-free £30k allowance for ex-gratia payments" but title refers to "termination payment" ... so have you considered whether PILON and/or PENP are applicable to any portion of that £30k?

2. A lot of different payments (with different tax treatment) are referred to as Ex Gratia ... for instance, an ex gratia payment that is made to an employee that has suffered discrimination in the workplace will tend to be taxable if it results in the termination of employment; whereas it will usually be tax-free if their employment is not terminated.

So the exact reason for the payment and the associated terms under which it was paid can affect not just whether it was correctly paid tax-free, but how it interacts with other taxes.

Moving on to ... "if someone gets £130k (including £30k ex-gratia), will other employment income in 2024/25 be taxed at 45% or there will still be 40% bracket available?"
IF (subject to the above points) the £30k was 'not liable to IT', then by definition it is not part of that person's 'total taxable income' in the year (as it were like ISA interest - which I know is not earnings but you get my drift).
BUT I cannot possibly comment on the impact on this specific taxpayer who may well have other earnings from earlier in the year.

BTW as you presumably know, for every £2 of taxable earnings over £100,000 ... the taxpayer's PA is reduced that year by £1. So it won't take much to affect those figures.

What is your role in this situation?
If you are 'advising' then it sounds like you need specialist advice; whereas if you are the affected taxpayer, you still need professional advice but your first port of call should be the ex-employer.

Thanks (3)
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By Matrix
23rd Apr 2024 16:36

Just check the P45.

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Replying to Matrix:
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By FactChecker
23rd Apr 2024 18:17

Practical (as always), and probably correct in vast majority of situations.

But that will only tell you how the ER treated it - which may not always be correct (in particular with these kinds of payment). Hence my long-winded wittering!

EDIT: also of course it's not unknown for an ER to issue a P45 *before* going on to make a payment-after-leaving (especially where some form of termination has taken place), and they're not allowed to issue a revised P45 (even though they will report the subsequent payments via RTI). So a P45 is not always the 'final word'.

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