On 20 April 2018, the Court of Appeal held6 that compensation for injured feelings in connection with a termination of employment fell within the statutory exemption for injury payments.
Although the compensation was, in the Court’s view, connected with the termination (and therefore prima facie taxable as a termination payment, albeit with the benefit of a £30,000 tax-free threshold) the question was whether the payment then fell within the full exemption provided by section 406 of ITEPA 2003.
The Court could find no reason not to give “injury” its ordinary meaning (including injury to feelings).
From 6 April 2018, “injury” in section 406 of ITEPA 2003 specifically includes psychiatric injury but expressly excludes injury to feelings. The decision is therefore of largely historic interest.
It does, however, confirm that discrimination-related payments for injured feelings can be paid tax-free if not connected with termination of employment.
The decision can be viewed here.