The £30,000 Tax-Free Myth: Lessons from a Costly Tribunal Case

When it comes to compensation for loss of office most tax advisers will, at some point or another, have heard someone say, “the first £30,000 is tax free, isn’t it?” 

Whether it be the prospective departing employee or, as is more often the case, the employer, the answer is, as so often with tax matters, “it depends”. Contrary to popular myth, it is by no means automatic that the first £30,000 of a payment made on termination of employment will be tax (and national insurance) free.

The recent First Tier Tribunal tax case of Simrajsar Ltd (“the company”) v HMRC illustrates a classic example of how taxpayers can come unstuck through not taking the correct professional advice beforehand.  Five company directors each received £30,000 on stepping down from their roles, the payments being described as "compensation for loss of office," and so both treated as tax-free by the company, and omitted from their personal tax returns.

HMRC took a different view, and assessed the company to both PAYE and National Insurance Contributions (NIC), a stance confirmed in the First-Tier Tribunal (FTT), which agreed that the payments were taxable earnings, on the grounds that they were not genuine compensation for loss of office.

The case illustrates the critical importance of taking professional advice before making any payments, and making sure that the paperwork is watertight.  It is always too late after the event, as the taxpayers found out to their cost in this case.

Andrew Cowe, Tax Advisory, Brearley & Co Accountants

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