In previous Tribunal cases it was decided that section 406 of the Income Tax (Earnings and Pensions) Act 2003 (“ITEPA”) provided that sums paid to employees under a settlement agreement for ‘injury to feelings’ was exempt from income tax. However, the recent case of Moorthy v Commissioners of HM Revenue and Customs has decided these payments are not exempt from tax.

The facts of the case were that Mr Moorthy worked for his employer until 2010, when he was made redundant. Mr Moorthy consequently claimed age discrimination and unfair dismissal at the Employment Tribunal. However, prior to any hearing, a settlement was reached with his employer for the sum of £200,000, which was labelled compensation for” loss of office and employment”. The employer treated the first £30,000 of this sum as exempt from tax (by section 403 of ITEPA) and then deducted tax and the basic rate for the remainder of the sum.

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