Injury to feelings payments not taxable
24 April 2018
The Court of Appeal has ruled that a settlement payment for injury to feelings does fall within the tax exemption under the Income Tax (Earnings and Pensions) Act 2003.
With thanks to Daniel Barnett’s employment law bulletin for providing this case summary.
Was a settlement payment for injury to feelings taxable under ITEPA 2003?
No, held the Court of Appeal in Moorthy v HMRC.
Mr Moorthy agreed a £200,000 settlement package with his employer. Although no specific amount was agreed at the time before the Court of Appeal the parties agreed that £30,000 was attributable to injury to feelings for age discrimination.
Section 406 of the Income Tax (Earnings and Pensions) Act 2003 provided that no tax is payable "on account of injury... to an employee". HMRC argued that 'injury to feelings' fell outside 'injury', as the tax exemption was only intended to apply to compensation for personal injury as opposed to injury to feelings.
The Court of Appeal, noting that there were some unclear authorities on this issue, resolved definitively that injury to feelings awards do fall within the exemption, and hence no tax is payable. It went on to note that this issue is unlikely to occur again, as with effect from this tax year the tax statutes has changed to add that: "Although 'injury'... includes psychiatric injury, it does not include injured feelings."