Injury to Feelings Award Not Taxable

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Posted on 09 Apr 2015

The EAT has ruled that injury to feelings compensation awarded for discrimination arising out of the termination of employment was not taxable.

In Timothy James Consulting v Wilton, W was awarded £10,000 for injury to feelings in respect of discrimination connected with the termination of her employment, as well as other sums in respect of her financial losses. The employment tribunal grossed the £10,000 up to £16,666 to take account of tax. The employer appealed, arguing that the injury to feelings award was not taxable and should not therefore have been grossed up. 

The EAT agreed. It considered that an award for injury to feelings is exempt from tax under s406 Income Tax (Earnings and Pensions) Act 2003 (“ITEPA”). This provides that payments made “on account of injury to, or disability of, an employee” are exempt from income tax. It acknowledged that the first tier tax tribunal recently ruled in Moorthy v The Commissioners for Her Majesty’s Revenue & Customs that an injury to feelings award for discrimination on termination is taxable as a termination payment under s401 ITEPA (and so taxable on the excess over £30,000). However, it preferred its own reasoning in the earlier decision of Orthet Ltd v Vince-Cain where it ruled that the payment fell within s406 ITEPA.

The injury to feelings award was not taxable and should not have been grossed up by the employment tribunal. 

Employers need to treat this decision with caution. The EAT’s decision is not binding on HMRC, which considers that injury to feelings compensation awarded for discrimination in connection with the termination of employment is taxable under the rules for termination payments in s401 ITEPA. Employers should therefore be accounting for tax on such payments. 

Injury to feelings compensation paid for discriminatory acts unrelated to termination can be paid without deducting tax. Where this is the case, employers should make this clear in the settlement agreement.

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