Settlement was mostly in connection with employment

The taxpayer’s employer terminated her employment for alleged misconduct and offered her £82 135 in compensation which she refused. She began employment tribunal proceedings but almost a year later after mediation she accepted a settlement of £6m from the employer. PAYE was applied to all but £30 000.

The taxpayer appealed saying the payment arose from negotiations based on the discrimination and victimisation she had experienced during her employment with the bank and the wish of the bank to avoid the embarrassment of publicity. HMRC agreed to an exemption of £44 000. This figure was chosen because it was the top of the upper band of employment tribunal awards for injury to feelings. It taxed the balance as employment income within section 401.

The First-tier Tribunal said it was clear the settlement payment was not ‘in consideration of’ the termination of employment. Nor was it received ‘directly...