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Lump sum compensation was taxable

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An employee agreed to forgo an allowance paid in addition to his annual salary in return for compensation, which he argued should be tax-free like a redundancy payment.  

13th Aug 2021
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Mr McAllister was an employee of the Commission of the Northern Ireland Assembly (the Commission). He received a base salary of £22,311, plus an allowance of £5,640 per annum in recognition of the skills needed for the post.

A pay review was carried out in 2010 and the finding was that McAllister and his colleagues were already receiving appropriate base pay and the allowance was therefore excessive and should be discontinued.

In the following years an equal pay review occurred which found that, despite the findings of the first review, a number of people still received the allowance. The Commission became concerned that, as the majority of these people were men, they may be the subject of equal pay claims from the female staff.

Compensation agreed

McAllister’s trade union advised him that his employer wanted to remove the allowance altogether but that they had negotiated a compensation payment. McAllister believed that this compensation would be tax free.

He was told in no uncertain terms that the payment had no strings attached and there were no clawback provisions and no minimum employment period following the payment. He was encouraged to take the payment as the alternative was to lose the allowance and to then seek compensation through the courts for breach of contract.

In September 2015 he accepted the offer and received £44,860, plus a final year’s allowance of £5,640. PAYE was deducted from these payments.

Tax position

In April 2016 McAllister contacted HMRC to say he didn’t believe the compensation payment should have been taxed. To support his case McAllister made a freedom of information request and received a redacted set of correspondence between his employer and trade union.

One of these documents discussed how to deal with the allowance as the matter was becoming increasingly urgent. Five suggestions were outlined, including buying out the current holders.

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