A recent case has considered whether a settlement payment for injury to feelings was taxable under the Income Tax (Earnings and Pensions) Act 2003 (ITEPA).

What is Injury to Feelings Compensation?

Injury to feelings compensation or settlement payments are paid in discrimination and harassment cases. The payments are awarded or agreed when it is claimed that discrimination or harassment has caused upset, distress or anxiety and can sometimes be of significant value depending on how long the discrimination or harassment took place, how severe it was deemed to be and the impact on a worker.

The Case – Moorthy v HMRC

In the case of Moorthy, he had agreed a £200,000.00 settlement package with his employer.  The parties agreed that £30,000.00 of this sum was attributable to injury to feelings for age discrimination.

During this case, it was referenced that section 406 of the Income Tax (Earnings and Pensions) Act 2003 provides that no tax is payable “on account of injury ….to an employee.”

HMRC argued that “injury to feelings” fell outside the definition of “injury” as the tax exemption was only intended to apply to compensation for personal injury as opposed to injury to feelings.

The Decision

The Court of Appeal, noted there were some unclear authorities on these issues and has resolved definitively that injury to feelings awards do fall within the exemption.  The decision therefore being that no tax is payable.

Now that the Court of Appeal has clarified the law on this particular point, this should be considered by employers defending Employment Tribunal claims for discrimination and/or harassment; dealing with employment disputes, negotiating severance packages and drafting COT3’s, and settlement agreements.

Farleys Employment Law & HR team are experts in discrimination, harassment, defending Employment Tribunal claims and settlements. For further information or assistance please contact the team on 0845 287 0939 or submit your enquiry through our online contact form.