If you are made redundant, or you make a discrimination claim against your employer, you may reach a settlement agreement. This means you receive an amount of money in return for agreeing not to take your employer to an employment tribunal or court. (Settlement agreements are known as compromise agreements in Northern Ireland.)
For the agreement to be legally binding, you must take advice from an independent solicitor.
What’s included?
Under current legislation, the first £30,000 you receive is usually tax-free – but it is more complicated than it might seem at first glance.
For example, the lump sum could comprise:
- Statutory redundancy payment
- Enhanced redundancy payment
- Outstanding holiday pay (if any)
- Qualifying pension payments (The structure of the settlement agreement must reflect statutory requirements)
- Payment in lieu of notice (With effect from April 2018, this amount will no longer be included in the tax-free allowance)
Your tax liability depends on how the settlement agreement is worded. It’s best if the payment breakdown is clearly defined in the settlement agreement, because this saves HMRC from having to do further investigation about the correct amount of tax and national insurance due.
Do you hold shares?
On leaving the business, you may be forced to sell your shares.
In private companies, the value of shares can be negotiated as part of the settlement agreement.
Capital gains tax is cheaper than income tax, so, ideally, this amount should not be included in the settlement agreement. It’s better to negotiate a separate share purchase agreement that explains this payment relates to share ownership rather than employment.
Do you hold unapproved share options?
Your employer may exclude share options in the original contract of employment or in the wording of the settlement agreement.
Where board discretion is permitted, you may be able to negotiate the value of your share options before the agreement is finalised. Again, the payment may be subject to capital gains tax rather than income tax, depending on the scheme documentation.
If your share options are lapsed or cancelled, they are not included in the tax-free allowance. Timing is therefore critical, as share options cannot be revived if the settlement agreement is entered into after employment has ended.
Need help?
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We have already helped thousands of people to win millions of pounds in compensation.
You have a choice of ways to pay, including ‘no win, no fee’.
We will also discuss the best methods of funding your case and seek to reach a solution that best suits your needs. This can involve a “no-win, no-fee” agreement if appropriate.