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TaxRobin
TaxRobin, Tax Consultant
Category: Tax
Satisfied Customers: 15716
Experience:  International tax
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I am about to receive a ex gratia payment from my employer

Customer Question

I am about to receive a ex gratia payment from my employer as part of an unfair dismissal settlement. I understand that the first £30K is tax free but I have been told that the remainder can be taxed at the base rate under certain circumstances. What must I / my employer do to minimize my tax liability on the amount over £30K?
Submitted: 3 years ago.
Category: Tax
Expert:  TaxRobin replied 3 years ago.
Hello and thank you for allowing me to assist you.
The first £30,000 of a payment which is paid in connection with the termination of employment is tax free, as long as it is not otherwise taxable as earnings.
You are correct that any excess over £30,000 is subject to income tax as normal, but is not subject to any NICs.
Two or more payments made in respect of the same employment, or different employments with the same employer, are aggregated for the purpose of the £30,000 limit so splitting the payment would not assist you as it would still be from the same employer.
HMRC will scrutinise these payments to make sure if the payment can truly be said to be paid in connection or consideration of the termination.
HMRC advises that the term ‘ex-gratia’ should only be used in relation to a payment the employer makes when under no legal or contractual obligation to do so.
Customer: replied 3 years ago.

Thank you. So if the total amount is £70,000, I would get the first £30,000 tax and NI free, then the remaining £40,000 would be taxable at my normal PAYE tax rate but exempt from NI? Is that right?

I had heard that if my employer issues my P45 before the payment, I only have to pay base rate tax on the £40,000 and no NI. Is that correct or not?

Expert:  TaxRobin replied 3 years ago.
That is correct. There really is no way to lessen the tax on the amount over the allowance unfortunately.
The issue of the P45 is not going to matter as your employer (or ex employer) would still need to account for the payment.
For payments made after termination and after the P45 has been issued, the employer must apply the 0T tax code. This means that tax is deducted on a non-cumulative "month 1/week 1" basis at 20%, 40% and 45% with no personal allowances.
Expert:  TaxRobin replied 3 years ago.
You are most welcome.
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