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Settlement Agreement – What is a Termination Payment and what Further Tax is Payable? (Part 4)

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27th February 2023

A settlement agreement termination payment is a payment made to an employee as part of a settlement agreement when their employment is ending.

The payment is always made in exchange for the employee releasing the employer from almost all future legal claims. This type of payment is typically made when the employee's employment is being terminated by the employer or when the employee is leaving the company voluntarily. The amount of the termination payment will depend on the specific terms of the settlement agreement, which can include factors such as the employee's length of service, salary, contractual entitlements and the reason for the termination. The payment can be made in a lump sum or occasionally in instalments and will be subject to income tax and national insurance if it exceeds £30,000.

If the termination payment is classified as compensation for loss of employment, it may be tax-free up to a certain limit, which is currently £30,000. This means that if the payment is classified as compensation, the first £30,000 would not be subject to income tax or national insurance. Anything above £30,000 would be subject to income tax at the employee's tax rate and would also be subject to national insurance contributions. It's important to note that the tax implications of a settlement agreement termination payment can be complex, and it's always best for the employee to consult with a tax professional or an accountant for guidance.

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If you have any questions concerning a settlement agreement, whether you are an Employer or Employee, please contact Noel McNicholas on 01926 887700 or