Resolution of the scandal surrounding the historical treatment of Post Office branch managers (‘sub-postmasters’) involves the payment of compensation in many cases. Much of that compensation could, however, disappear in tax.
Tax Policy Associates (TPA) suggests that the impact of tax on settlements paid to the victims ‘has not been thought through’, highlighting two key issues:
the payments are compensation for loss of earnings and are taxable. Because multiple years are effectively being taxed in one go, individuals could receive a large lump sum taking them into the 40% tax bracket, with much of that sum being lost in tax. TPA points out that no steps appear to have been taken to address this, for example by ensuring the payments are not taxable or by increasing the amounts to cover the additional tax; and
the individuals are not being offered tax advice. This risks recipients not only being hit with an unexpected tax bill, but also potentially not realising they need to disclose amounts in their tax returns.
TPA suggests that the UK government should include a solution in the Spring 2023 Finance Bill, by introducing an exemption from income tax on the compensation payments which would apply retrospectively.
Resolution of the scandal surrounding the historical treatment of Post Office branch managers (‘sub-postmasters’) involves the payment of compensation in many cases. Much of that compensation could, however, disappear in tax.
Tax Policy Associates (TPA) suggests that the impact of tax on settlements paid to the victims ‘has not been thought through’, highlighting two key issues:
the payments are compensation for loss of earnings and are taxable. Because multiple years are effectively being taxed in one go, individuals could receive a large lump sum taking them into the 40% tax bracket, with much of that sum being lost in tax. TPA points out that no steps appear to have been taken to address this, for example by ensuring the payments are not taxable or by increasing the amounts to cover the additional tax; and
the individuals are not being offered tax advice. This risks recipients not only being hit with an unexpected tax bill, but also potentially not realising they need to disclose amounts in their tax returns.
TPA suggests that the UK government should include a solution in the Spring 2023 Finance Bill, by introducing an exemption from income tax on the compensation payments which would apply retrospectively.
