SE12965 – Termination payments and benefits: compensation for discrimination

Apart from the Employment Rights Act 1996 (see EIM12950) there are many statutory provisions that provide rights to compensation for various forms of discrimination by employers. The most common claims are in respect of discrimination on grounds of sex, disability, politics and religion.

Such payments are taxable only under Section 401 ITEPA 2003. Further, they are only taxable where they are “connected” (see EIM13012) with the termination or. If the settlement does not specify what part of the payment is so “connected”, the facts must be analysed with care and part apportioned on a just and reasonable basis. Any part of the settlement that can reasonably be attributed to discrimination occurring before the termination should be accepted as not being employment income.

An example of compensation for discrimination that falls wholly within Section 401 ITEPA 2003 is that paid as compensation for sexual discrimination to members of the armed forces who were once dismissed on becoming pregnant. In that case, the whole payment is “connected” only to the discrimination suffered in respect of the termination itself and not to any earlier act or event.

An example of compensation for discrimination that falls partly within Section 401 ITEPA 2003 is that paid as compensation for sexual discrimination occurring over a period leading up to termination and also inherent in the termination itself. To establish the part within Section 401 ITEPA 2003, the facts need to be examined and a reasonable apportionment agreed. If such agreement cannot be reached, refer the matter to Employment Income Technical.