This is the fifth blog in our series ‘simplifying settlement agreements’ where we tackle these agreements clause by clause and give you the essential information in a nutshell. Our director Cathy Donald explains the key aspects of tax clauses and what to look out for in our second blog on tax.

Tax on termination payments

Your employer will usually make deductions at source for any income tax and employee national insurance contributions which is due on termination payments. The tax treatment applied will depend upon the timing of the payments.

Payments made before the termination of your employment

If your employer makes a termination payment (such as a redundancy payment) before your employment ends and your P45 is issued, then this will be shown in your final pay slip and will be taxed (to the extent that it exceeds the £30k exemption) on the basis of your normal tax code.

Payments made after the termination of your employment

If the termination payment is made after you leave your job and your employer has already issued your P45, your employer is required to use an 0T tax code for any taxable elements of the payment. This means you will be treated as having no personal allowance and tax will be deducted at basic, higher and additional tax rates as if it were your first payment of PAYE income in the tax year.

The 0T code means you may overpay tax on taxable elements of the redundancy payment. You will be able to reclaim any overpaid tax but may not be able to do this until the end of the tax year, when your tax liability for the whole tax year can be reconciled.

For information on tax, please see here: www.ergolaw.co.uk/blog/2021/3/12/settlement-agreement-series-4-tax-1

Want to know more?

If you have been offered a settlement agreement by your employer, we would be happy to guide you through the process. Our team of employment solicitors is highly experienced in advising and negotiating on settlement agreements, providing specific expert advice tailored to your particular circumstances. Contact us at info@ergolaw.co.uk or on 0131 618 7007 to ensure that you are well informed and achieve the best possible deal in your circumstances.

You can also find out more about settlement agreements here or take a look at our other blogs in the simplifying settlement agreement series.