The first £30,000 of compensation for loss of office on genuine ex gratia payments is tax-free. To qualify for the exemption, there must be no contractual right to the payment and it must not be in lieu of notice.
An individual was dismissed from his employment in 1996. His contract of employment had provided that his employer ‘may make a payment in lieu of notice to the employee’. He took proceedings against his former employer, claiming damages for unfair dismissal and breach of contract.
The court held that the contract had given the employer the discretion to make a payment in lieu of notice, but had not required it to do so, so that the claim had been for wrongful dismissal. See HMRC Tax Bulletin 63 (archived). [Wilson v Clayton CA 2004, 77 TC 1]
A woman began employment with a company in January 2005. In April 2005 the company asked her to leave and subsequently paid her £17,971 from which it deducted tax. The woman filled in her self-assessment tax return, treating this sum as non-taxable. HMRC issued a notice of amendment and the taxpayer appealed. The First-Tier Tribunal dismissed her appeal, holding that it was a taxable emolument since it had been paid in accordance with her contract of employment. Ms L Cornell v HMRC FTT [2009] UKFTT 140 (TC)