Compensation for Injury to Feelings Is Tax Free, Rules Court of Appeal

May 3, 2018

Those who suffer unlawful discrimination in the workplace are entitled to be compensated for injury to their feelings and, following an important Court of Appeal decision, such awards will henceforth be tax free.

The case concerned a company director, aged in his mid-50s, who claimed that he had been selected for redundancy due to his age. After he complained of unfair dismissal and age discrimination, the company agreed to pay him £200,000 on an ex-gratia basis.

The settlement was agreed without admission of liability and the sum was not apportioned between the constituent parts of his claims. After an issue arose as to the taxability of the payment, the First-tier Tribunal found that it was subject to Income Tax in its entirety. That decision was subsequently upheld by the Upper Tribunal (UT).

In ruling on the man’s appeal against the UT’s ruling, the Court agreed that the sum was in principle taxable by operation of the Income Tax (Earnings and Pensions) Act 2003. It was clear beyond reasonable doubt that the sum had been paid to him directly or indirectly in consideration or in consequence of, or otherwise in connection with, the termination of his employment.

However, in a decision that clarified the law on the point, the Court found that that part of the sum which related to the man’s injury to feelings claim fell within the tax exemption provided by Section 406 of the Act. That exemption extends to payments made to employees as compensation for injuries suffered at work and the UT had erred in law in finding that it only applied to physical injuries.

The Court noted that awards of compensation for injury to feelings had been expressly authorised by Parliament as a means of combating various forms of unlawful discrimination. The fact that the man’s injury was to his feelings alone did not make it any less an injury and, on a natural reading of Section 406, it fell within the exemption. It was agreed that, in the event of a ruling in the man’s favour, £30,000 of the sum would be exempted from Income Tax.

At Tayntons we can assist and advise you in Unfair Dismissal and Age Discrimination cases, contact us for an initial 45 minute consultation for £75.00 plus VAT (£90.00). Call Tayntons Solicitors in Gloucester on 0800 158 4147 to book your initial consultation.

Moorthy v The Commissioners for Her Majesty’s Revenue and Customs. Case Number: A3/2016/1369