Are Employment Tribunal Awards Taxable in the UK?

Winning an employment tribunal award is a victory, but are employment tribunal awards taxable in the UK? The answer depends on the type of award and HMRC rules.

Understanding Taxation of Employment Tribunal Awards

Are employment tribunal awards taxable in the UK? Most parts of tribunal awards are subject to tax under HMRC rules, but genuine compensation for termination up to £30,000 is tax-free, while elements like basic awards and arrears of pay are always taxed as earnings. This guide breaks down the tax treatment for unfair dismissal, discrimination claims, injury to feelings, and settlements to help you know what to expect from your payout.

Employment tribunals consider tax implications when calculating awards, often grossing up amounts so you receive the intended net sum after deductions. Understanding these rules is crucial as incorrect tax handling can lead to unexpected bills from HMRC or disputes with your former employer.

We will cover the key components of awards, the £30,000 exemption, specific tax rules for different claims, and practical steps for handling payments.

What Parts of a Tribunal Award Are Taxable?

UK employment law requires tribunals to account for tax when making monetary awards. According to the Employment Tribunal Remedies Handbook, awards can be treated as salary payments, sums due in connection with employment, or fall within termination payment exemptions. For instance, arrears of pay or holiday pay are taxed like regular earnings because they represent money you were owed for work done.

Not all awards are identical in tax treatment. Basic awards for unfair dismissal are always taxable, while compensatory elements for future losses might benefit from the tax-free threshold. Tribunals aim to ensure the net amount you receive matches the loss calculated, adjusting for expected tax.

The £30,000 Tax-Free Exemption for Termination Payments

Under ITEPA 2003 section 401, up to £30,000 of genuine termination payments is exempt from tax, but this aggregates across multiple payments and excludes earnings.

The £30,000 exemption applies to payments ‘in connection with’ the termination of employment, such as ex gratia sums or compensation for loss of office. However, it does not cover contractual payments like notice pay or bonuses earned before termination. If your total termination-related payments exceed £30,000 in a tax year from the same or associated employers, only the excess is taxed.

Tribunal awards for unfair dismissal compensatory losses often qualify for this exemption after deducting the taxable basic award. For example, if your basic award is £10,000, only £20,000 of compensatory award remains tax-free. Discrimination awards have no cap but follow similar tax logic.

Tax on Basic and Compensatory Awards

Basic awards for unfair dismissal are fully taxable as earnings; compensatory awards are split, with arrears taxed fully and other losses potentially tax-free up to £30,000.

The basic award, calculated like redundancy pay based on age, service, and week’s pay, is taxed under section 62 ITEPA 2003 as it mimics statutory redundancy. Your employer deducts income tax and National Insurance via PAYE.

Compensatory awards cover financial losses like lost earnings. Arrears up to the effective date of termination are taxed as earnings. Future loss compensation may fall under the £30,000 exemption. Tribunals cap compensatory awards at £115,115 (2024/25) for unfair dismissal but not discrimination.

Real-world example: A £5,000 basic award (taxed) leaves £25,000 tax-free for compensatory losses. Excess is grossed up and taxed.

Injury to Feelings and Discrimination Compensation: Tax Rules

Awards for non-financial harm like injury to feelings, now taxed post-2018 budget changes, are treated as termination payments. Lower Vento band (£1,200-£11,700) to upper (£56,000+). They contribute to the £30,000 threshold but require grossing up if taxable.

Discrimination claims under Equality Act 2010 have no compensation cap. Financial loss elements are taxed like unfair dismissal, while pure injury to feelings follows the new tax rules. Tribunals gross up these to account for tax.

Example: £25,000 injury to feelings after 2018 is grossed up, say at 40% tax, becoming around £41,667 gross for £25,000 net.

Grossing Up: How Tribunals Ensure Fair Net Payments

Tribunals gross up taxable elements so you receive the full intended net award after HMRC deductions.

Grossing up adds extra to cover expected tax, using your marginal rate based on tax code, prior earnings, and projections. For 40% tax, £10,000 net becomes £16,667 gross (£16,667 * 0.6 = £10,000).

This applies to compensatory awards exceeding the tax-free limit and injury to feelings. Tribunals use tables for rates and consider the dismissal tax year. Failure to gross up properly can leave you short.

HMRC manuals like EIM45000 guide this; tribunals reference them for accuracy.

1. Calculate net loss intended.
2. Determine marginal tax/NI rate.
3. Gross up: Net / (1 – tax rate).
4. Award the gross figure.

ACAS Settlements (COT3) and Similar Tax Treatment

ACAS-brokered COT3 agreements are binding and taxed identically to judgments. Employers must clarify payment types in writing (e.g., ‘£X compensation for termination’). Without specification, HMRC may deem all taxable.

Settlement payments for injury to feelings or discrimination follow the same post-2018 tax rules. Use settlement agreement templates specifying tax-free elements to avoid disputes.

ACAS guidance stresses employers handle PAYE on taxable parts; you report any excess via self-assessment.

Next Steps: Reporting to HMRC and Employer Responsibilities

Your former employer pays the award, deducting tax/NI on taxable parts using your P45 or code. They issue form P45 or P800 for reconciliation.

If over £30,000 or self-paid, file self-assessment. Contact HMRC helpline for queries. Keep tribunal judgment and payment breakdown.

This is general guidance; consult ACAS or a tax advisor for your situation.

Key Points on Whether Employment Tribunal Awards Are Taxable in the UK

In summary, are employment tribunal awards taxable in the UK? Yes, but with nuances: basic awards and arrears always are, while compensation benefits from a £30,000 tax-free limit under HMRC taxation rules. Injury to feelings is now taxable, and tribunals gross up for fairness.

Knowing these rules helps you plan finances post-tribunal. Always request itemised awards specifying tax treatment to avoid surprises.

For settlements or complex claims, clear documentation protects your net payout.