Taxation of discrimination settlements or awards, including injury to feelings elements, clarified

For some time the tax tribunals and their employment law counterparts have taken different approaches to the tax treatment of discrimination settlements and awards. 


On 14 January 2016 the Upper Tribunal (Tax and Chancery Chamber) handed down judgment in Moorthy v HMRC, and in so doing clarified the law in this area. 


Henrietta Hill QC, assisted by Mary-Rachel McCabe, represented the Equality and Human Rights Commission, who intervened in the case given the difficulties posed by the uncertainty in the law.


The Upper Tribunal in Moorthy, rejecting the approaches taken by the First Tier Tribunal in earlier cases, and the Employment Appeal Tribunal, held, in summary that:


  • Any payment or other benefit which is received “directly or indirectly in consideration or in consequence of, or otherwise in connection with” the termination of a person’s employment, a change in the duties of a person’s employment, or a change in their earnings, is taxable by virtue of the Income Tax (Earnings and Pensions) Act 2003 (“ITEPA”), s.403;
  • This applies even if the payment or other benefit was also made in settlement of a discrimination claim, for unfair dismissal, or for other reasons; and
  • Damages for injury to feelings are not to be classified as payments or other benefits “on account of injury to, or disability of, an employee” within ITEPA, s.406 and so they fall to be taxed if they relate to termination of employment or the other events listed in s.401.


For more detail, read here

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