The Upper Tribunal has ruled that a payment in respect of injury to feelings due to a discriminatory dismissal is taxable in the same way as other payments in connection with termination and does not come within the exception for payments made "on account of injury to an employee". "Injury" in this context means a medical condition and does not include "injury to feelings". The Tribunal considered that conflicting EAT authorities were wrongly decided. (Moorthy v HMRC)

Employers should therefore ensure that tax is appropriately deducted from payments for injury to feelings in respect of a discriminatory termination. In contrast, payments for injury to feelings in respect of discrimination during employment can be paid tax-free. Where relevant, it will be important to expressly apportion any compensation between these two types of payment in the settlement agreement, to facilitate the different tax treatment.