The Upper Tribunal (Tax Chamber) has held that a settlement payment for injury to feelings made in connection with a termination of employment was taxable as a termination payment.
The payment was made to settle all the taxpayer's claims against the employer, including claims for age discrimination arising during the redundancy selection process. This decision confirms that the tax treatment of compensation for discrimination depends on whether the discrimination is connected with the termination.
Compensation for discrimination that occurs solely during employment (even if paid on termination) is neither earnings nor a taxable termination payment and can be paid without deduction of tax. However, compensation for discrimination connected with the termination will be taxable as a termination payment. The Upper Tribunal also determined that the tax exemption for compensation paid on account of "injury" did not include compensation for injury to feelings. Employers must apply this interpretation of injury when deducting tax from the compensation payment (in excess of the £30,000 exempt amount). Otherwise, employers risk HMRC seeking under-deducted tax from them rather than the employee.