Settlement payout and tax - HELP!

[LastOneDancing]

I'm at the end of my thread - if anyone can help I'd be so grateful.

A week ago Monday I was called into a meeting and offered a settlement payment to leave my job.
While things haven't been great, this was still a huge shock.

I got a solicitor and rejected the first 2 settlement offers, I am now ready to accept the 3rd.
This settlement is comprised of compensation only and no element of bonus/ holiday pay etc.
My notice period has mutually been agreed to be 2 weeks rather than 3 months.

But.... My solicitor is saying I may be liable for tax on the settlement (under 30k) if HMRC decide that the waiver in my notice period was a tax avoidance scheme. Essentially I'd have to pay tax on what I would have earned in that time? Settlement contract from employer says it's tax exempt & they're not budging on that position so far - won't provide a waiver that they will pay any tax, won't increase to cover the tax element.

I have contacted ACAS, HMRC... They all say 'its a grey area'

Can anyone help? Do I fight my employer to cover the tax or provide a waiver; or can I finally have some peace and accept the settlement without fear of the taxman? ACAS have asked if it's tax exempt, why is it an issue to give me the waver? They've also said I could threaten to go back, but I can't even consider that incase they agreed.
Solicitor is also costing an absolute fortune so really need a resolution
TIA

I'd say that there is quite a risk that there would be a finding that tax is payable on an amount equal to the balance of the notice period.

If you need certainty then it would be better to agree in the settlement agreement that the full notice is being in paid lieu (taxable) and then any other amount is tax free up to the 30k. Of course that may well involve you asking them to increase their offer again.

Employers never give tax indemnities so this would be your best way to get certainty.

Unfortunately, it is a grey area.

If your contract requires your employer to give you three months' notice, then they are texhnically in breach of the terms of the contract if they reduce your notice pay to two weeks because, had they paid your notice pay correctly, then it would have been taxable.

However, a lot depends on the reasons why your employment is being terminated. If it's a straight forward redundancy, then HMRC would have every right to declare a breach in contract by your employer. If, on the other hand, your employment is being terminated under disciplinary/competency grounds, your employer would normally have a clause in the contract giving them the right to terminate your employment without notice, avoiding the breach. In this case, any termination payment could be deemed as a loss of office/compensation payment and be non-taxable to the £30,000 limit.

Can I ask is it just the PILON that is tax deductible. So if you are paid £30k as a lump sum as one month for every year you worked for company for example plus £10k for your notice period payment in lieu then its just the £10k that is taxable not the lump sum for redundancy?

Thank you @headintheproverbial - my solicitor emailed and asked for an increase (or the indemnity) and they have some far refused to budge.

@SueDunome it is a termination on competency grounds - not redundancy. This is a good example of why I am confused! I read in the following worksmart.org.uk/work-rights/pay-and-contracts/notice-periods/my-notice-pay-taxable that the PILON clauses mean tax IS payable?

Thank you both for responding.

Is there a clause in your contract that gives your employer the right to terminate your employment without notice, under competency grounds? If so, this may be enough to satisfy HMRC that the payment is non-taxable, but they may require your employer to provide more details of the reasons for the termination. Also, the fact that your employer is prepared to pay you two weeks notice may complicate the issue further as, if they are prepared to pay you notice then why not the full three months?
Sorry, I know this isn't what you want to hear. The likelihood is that HMRC won't query it, unless they already have enough information about your case to trigger them to do so. The only thing you can do is sit it out and wait and see what happens.

At least the advice is consistent! Everyone is saying it's very unlikely that HMRC will investigate but knowing my luck they would! I don't mind paying the tax if needed, but I don't want to overpay and I don't want to incurr a fine.
It feels crazy having to go to such lengths to find out if I have to pay tax.

Final question I promise, and I think this is what headintheproverbial advised - if the termination agreement was worded as in GreenSeededGrape's example - 10k was payment in leiu of notice and 17k was compensation, would that be clearer and I'd only be liable for tax on the 10k? Which I believe the employer is responsible for deducting & paying on my behalf?
(So I'd reasonably expect an increase in the 17k compensation payment to cover the tax)

I'd much rather this. I'd know it was all over

No one can really say any more than your solicitor (who is being paid to advise on the agreement) has. Ultimately it’s up to you whether you want to sign it on those terms or not.

Also, it’s customary for an employer to contribute to legal fees, may be worth at least asking for that.

If I was acting for the employer I wouldn’t be providing a tax indemnity or an increase either.

@bakedbeans - thank you for your advice.

Yes my employer will include a standard sum to cover the contract review. This has been spent several times in the negotiation process.

Can I ask the reasons why you wouldn't offer indemnity if 1. It's only an issue if the taxman investigates and 2. Deems the change of notice to be a tax dodge? Potentially it's a non-thing (just be that causes me further stress!). I appreciate you aren't my employer & can only speak for your own perspective.

The PILON payment would need to equate to the true value of your notice period, so three months less the two weeks your employer is already going to pay you.
Any further compensation payment would then be non-taxable, up to £30,000.

Isn’t this changing soon? Hasn’t been well publicised from what a colleague was saying.

Thank you SueDunime and everyone who contributed. At least it is clear in my mind what I potentially owe.

I accepted the settlement today (by email - obv nothing will be done until next week) so no more solicitor costs.

TittyGolightly - my solicitor mentioned this. Hopefully it will be clearer after the changes (but alas too late for me!)

Titty from googling it looks like redundancy packages up to £30k were tax free but from April any PILON will be taxable even if the overall redundancy payout is less than £30k.

Sorry OP for jumping on your thread. I am due to be made redundant soon and your thread flagged the new tax which I didn't know about.

I may be wrong here but is it not the employers responsbility to deduct the correct tax and NI? And if they get it wrong then HMRC will ask the employer to stump up, not the employee. Then it’s up to the employer to try to recover it from the ex employee.

Not a problem GreenSeededGrape - Im sorry to hear that. I believe straight forward redundancy is much simpler. ACAS we're good, it might be worth giving them a call?

Ceeveebee yes, I have been told this too. It's the fact they're altering my notice period (it's officially my last day today! Whoo!) that muddies the water.

Normally for a settlement agreement I would pay a lump sum (non-taxable) plus the normal notice (taxable) and these would be put through the payroll system as two separate elements in order for tax to be correct. I have never worked anywhere that allows the notice payment to be reduced (except in the case of gross misconduct) but as PP said, your contract may provide for this - though in my mind, this part of the payment should still be taxable.

Presumably the full amount of notice, taxed, would be more than the agreed amount of notice, non-taxed? You could push for your normal notice period to be paid (and taxed) so there is no risk of HMRC coming after you (though I think the risk is low anyway) but your employer may then decide to reduce the non-taxable element they offer.