Employer under no implied duty on tax treatment

In Norman v Yellow Pages Sales an employment dispute was settled on the basis that the employer would pay the claimant employee £53,000. Nothing was agreed about tax. The employer then paid the claimant £47,657, having deducted basic rate PAYE income tax from the balance over £30,000.

The employee claimed that this was wrong, saying the employer was under an implied duty to try to make an apportionment of the settlement sum into taxable and non-taxable sums by allowing some of the payment to be compensation for injury to feelings for her discrimination claim so that such an element would also not be taxable.

The Court of Appeal disagreed. It found there was no such duty on the employer. The employer simply had to operate the PAYE system in the normal way. It would then be up to the employee to argue with HMRC as to why no tax – or maybe no further tax – was payable.

Points to note:

  • This case is good news for employers and the Court of Appeal specifically acknowledged that, when trying to achieve a global settlement, it will often not be helpful for the employer to be bound to earmark different sums to cover different claims.
  • However, it is always important to be properly advised as to the tax implications of any settlement with an ex-employee as allowing for tax may significantly affect the size of the sums at stake.