Compromise agreements, also known as settlement agreements, are legal documents that are signed by both employers and employees as a means of resolving disputes or ending employment relationships amicably. In these agreements, the employer typically agrees to provide the employee with a sum of money in exchange for the employee`s agreement not to pursue any legal claims against the employer.

If you are faced with the prospect of signing a compromise agreement, it is important to understand the tax implications that come with it. In this article, we will be answering the question, “Do you get taxed on compromise agreement?”

The short answer is yes, you do get taxed on a compromise agreement. This is because the sum of money you receive as a settlement payment is considered taxable income by the HM Revenue and Customs (HMRC). Therefore, if you receive a settlement payment that is over the tax-free personal allowance of £12,570 (2021-2022 tax year), you will need to pay tax on it.

The amount of tax you will need to pay depends on the total amount of your settlement payment, your tax rate, and any other sources of income you may have. It is worth noting that the tax rate is usually higher on settlement payments than on other types of income.

It is also important to note that some settlement payments may be tax-free, such as those made in relation to injury or illness suffered at work. However, these cases are relatively rare, and most compromise agreements will be subject to tax.

When you sign a compromise agreement, your employer will usually deduct tax and National Insurance contributions from your settlement payment before it is paid to you. This is done to ensure that all tax obligations are met and to avoid any legal disputes in the future.

It is important to speak to an experienced tax advisor if you are unsure about the tax implications of a settlement payment. They can help you understand your tax obligations and ensure that you are paying the correct amount of tax.

In conclusion, if you receive a settlement payment under a compromise agreement, you will need to pay tax on it. However, the amount of tax you will need to pay depends on factors such as the amount of the payment, your tax rate, and any other sources of income you may have. It is always best to consult with a tax advisor to ensure that you are meeting all of your tax obligations.