The ruling of the First Tier Tribunal has been upheld by the Upper Tribunal (Tax and Chancery Chamber) reported at [2016] IRLR 258. The Upper Tribunal rejected the interpretation of Section 401 of the Income Tax (Earnings and Pensions) Act 2003 applied by the EAT in Timothy James Consulting Ltd v Wilton [2015] 368 that awards for injury to feelings consequent on a termination of employment were not taxable and agreed with the First Tier Tribunal that such payments were taxable. This means that where an award of compensation exceeds the statutory exempt amount of £30,000 (inclusive of any injury to feelings award) should be grossed up to ensure that the payment actually received by the Claimant fully reflects the compensation awarded by the tribunal. Similarly attributing payments in a settlement agreement to injury to feelings can no longer be used as a device to reduce potential tax liability.  The position is more complicated if the injury to feelings award (or settlement) covers acts of discrimination which precede the termination of employment.  Section 401 only applies to payments arising in connection with the termination of employment and therefore in principle in so far as injury to feelings awards relate to acts which precede termination, these will not amount to taxable emoluments but in practice, it may be difficult to distinguish between the two. It is not clear whether the ruling in Moorthy also applies to injury to health awards.

This update was written by Anthony Korn, Anthony is part of the Employment Group at No5 Chambers. Please click here to view Anthony Korn’s employment practice.