Employment Tax

Compensation for injuries at work

Produced by Tolley in association with Paul Tew
  • 25 Oct 2021 14:12

The following Employment Tax guidance note Produced by Tolley in association with Paul Tew provides comprehensive and up to date tax information covering:

  • Compensation for injuries at work
  • Introduction
  • Compensation payments
  • Lump sums
  • Ongoing payments
  • Injuries to feelings

Compensation for injuries at work

Introduction

If an employee is injured as a result of something that happens at work then, in certain circumstances, compensation payments can be made to them which have no income tax, NIC or reporting requirements.

Issues regarding compensation payments for injuries suffered at work are covered in EIM06450.

Compensation payments

Lump sums

There are no income tax, NIC or reporting requirements associated with compensation payments for injuries suffered at work as long as all the following requirements are satisfied:

  1. the payment to the employee is of the same nature and magnitude that would be made to a member of the public suffering the same injury

  2. the employee has no contractual right to the payment under their terms of employment

  3. it follows negotiations between the company and the employee, or their representative, about the nature of the compensation payment

  4. the employee agrees not to pursue a legal claim against the employer

If all of these conditions are satisfied, and the payment is not one which suggests that there is an element of reward, the compensation is not classified as earnings within ITEPA 2003, s 62 nor as employment income under ITEPA 2003, s 403.

If the payment is due because of a contractual term, then the full amount is treated as earnings. It should be included in payroll and income tax, and Class 1 NIC deducted under PAYE at the time of payment.

If the paymen

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