In a recent case, an employer had agreed to pay a compensatory lump sum under a settlement agreement to an employee, subject to the employee agreeing to waive any other claims and enter into certain confidentiality and non-disclosure obligations.
As the lump sum was received in connection with the termination of the employee’s employment the employer deducted tax from the sum. The Employee argued, however, that the sum was wholly in consideration of them agreeing to be bound by the obligations and had no connection with their termination.
The First-tier Tribunal held that as the compensation sum was consideration for the employee entering into the obligations in the settlement agreement then it was payment for a restrictive undertaking and, therefore, taxable as employment income.
