Compromise Agreement Tax HMRC: What You Need to Know

If you`re facing redundancy or a dispute with your employer, you may be offered a compromise agreement to settle the matter. A compromise agreement is a legally binding contract between you and your employer, which usually involves a payment in exchange for you waiving your rights to bring any further claims against them. However, one of the key questions you may have is whether compromise agreement payments are subject to tax and National Insurance contributions (NICs).

The short answer is yes, they are. Compromise agreement payments are treated as income and are subject to income tax and NICs. This applies regardless of whether the payment is made in the form of a lump sum or as a series of payments over time. However, the exact amount of tax and NICs you`ll owe will depend on a number of factors, including how much you`re being paid and how it`s being paid.

Here are some key things you need to know about compromise agreement tax and how HMRC (Her Majesty`s Revenue and Customs) will treat your payment:

1. Income tax

Any payment you receive under a compromise agreement will be subject to income tax at your marginal rate. This means the rate of tax you pay will depend on how much you earn in a given tax year. For example, if you earn £50,000 and you receive a £10,000 payment under a compromise agreement, you`ll pay tax at the higher rate of 40% on the £10,000 payment.

However, there are some ways you can reduce the amount of income tax you pay on your payment. For example, you may be able to negotiate with your employer to split your payment between two tax years, or you may be able to make a one-off contribution to a pension scheme to reduce your taxable income.

2. National Insurance contributions

Compromise agreement payments are also subject to NICs, which are paid by employees and employers on earnings. The rates of NICs you`ll pay will depend on whether your payment is a lump sum or paid over a series of payments.

If your payment is a lump sum less than £30,000, you won`t have to pay NICs on it. However, if your payment is over £30,000, you`ll have to pay NICs on the amount over this threshold at the rate of 2%. For example, if you receive a £40,000 payment under a compromise agreement, you`ll pay NICs on the £10,000 over the threshold at the rate of 2%.

If your payment is made in a series of payments, NICs will be deducted from each payment at the usual rates.

3. HMRC reporting requirements

Your employer will have to report any compromise agreement payments to HMRC using a P45. This will show how much you`ve been paid and how much tax and NICs have been deducted. You should also receive a P60 at the end of the tax year, which will show you how much tax and NICs you`ve paid on your payment.

It`s important to keep all paperwork relating to your compromise agreement, including your P45 and P60, in case you need to refer to them in future.

In conclusion, if you`re offered a compromise agreement, it`s important to understand the tax and NICs implications of your payment. Always seek professional advice if you`re unsure of your tax and NICs obligations.