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bigduckontax
bigduckontax, Accountant
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I am being awarded a payout for disability discrimination

Resolved Question:

I am being awarded a payout for disability discrimination and unfair dismissal. The tribunal are calculating my award. They have mentioned that I will have to pay 40% tax on certain elements of the award. My fees and costs have come to approx. £130K, however I am being told I cannot offset this expenditure against the tax.
Is this correct as it seems unfair that in employment tribunals cases you cannot recoup costs for the other party, and still have to pay tax and not allowed to take into account costs.
I understand if i was i business i could offset the costs.
Help, it seems I have fought a 6 year battle, to end up paying my awards to the tax man, and effectively coming away with nothing.
Submitted: 1 year ago.
Category: Tax
Expert:  bigduckontax replied 1 year ago.

Hello, I am Keith, one of the experts on Just Answer, and pleased to be able to help you with your question.

Here is the guidance from Mayo Wynne Baxter, Solicitors on the matter of taxation of compensation:

'Awards greater than £30,000

Where the combined sum of the Basic Award and Compensatory Award is greater than £30,000, the tribunal will have to add the sum that is deductible for tax back onto the award to cancel out the tax burden imposed on the employee. This is done by:

  1. Calculating the employee’s loss based upon the net value of salary and benefits (i.e. after tax and National Insurance Contributions) to be compensated.
  2. Deducting any part of the £30,000 exemption that remains available.
  3. Grossing up the resultant figure to reflect the tax due from the employee on the excess over £30,000. The amount should be grossed up at the employee’s marginal rate (20% for lower rate tax payers, 40% for higher rate).
  4. Adding the grossed-up figure to the compensation.

Awards greater than £68,400

There is no official guidance in cases where, if the employee’s net loss, once grossed up, exceeds the current maximum Compensatory Award of £68,400. The consensus however, is that the tribunal should award the maximum and the employer should deduct PAYE (at the appropriate percentage rate) on the excess over £30,000 before making the payment to the employee.'

The Tribunal should gross up the award so that you are not out of pocket from the award.

I do hope that you have found my reply of assistance.

bigduckontax and other Tax Specialists are ready to help you
Expert:  bigduckontax replied 1 year ago.

Thank you for your support.