Tottenham Hotspur Players’ Settlement Agreement and Tax

Tottenham Hotspur Players’ Settlement Agreement Sparks Clarification on Employment Termination Tax Payment

A recent case heard by the First-Tier Tax Tribunal (FTT) involving the London-based football team Tottenham Hotspur has clarified the relationship between tax and employment termination payments made under a settlement agreement.

Facts of the Case

In 2011, two players transferred from Tottenham to Stoke City by mutual consent before their contracts had officially expired. Due to the early termination of their contracts, each player was paid a compensatory sum under their settlement agreements. As is standard under a settlement agreement, the first £30,000 paid was free of income tax. The entire amount was paid free of national insurance contributions. This was due to the fact that the club believed that the payment did not arise “from” the players’ employment, but was in fact compensation for early termination of contract. However, HMRC disagreed claiming that the full settlement agreement payment was subject to national insurance contributions, on the basis that it had arisen from the players’ employment. Tottenham appealed this decision to the FTT.

Decision of the FTT

The tribunal found in favour of the club, stating that no national insurance contributions were payable. It purported that the settlement agreement payments were made in return for the surrender of some of the players’ rights under their employment contracts, and therefore did not flow “from” their employment.

Outlining the Tax Rules for Settlement Agreement Payments

In its judgement, the FTT outlined the rules regarding taxation of settlement payments. It highlighted the importance of the circumstance of the settlement agreement as this has an effect on the amount of taxation on the payment made.

What Payments under a Settlement Agreement are Taxable?

Payments that the employee receives as part of their contractual entitlement are taxable.

For example:

• Payment of outstanding salary entitlement.

• Holiday pay.

• Other employment related earnings e.g. bonus or commission.

• Pay received while on “garden leave”.

• Benefits e.g. retaining a company car.

• Any other payments made under the employment contract, e.g. payment in lieu of notice.

What payments under a settlement agreement are not taxable?

Payments which do not flow from the employment, such as payments made as compensation for breaking the employment contract, will be totally free of national insurance contributions.

For example:

• Statutory, contractual and ex gratia redundancy payments made on account of genuine redundancy.

• Non-contractual payments made as compensation for loss of employment. Note that this only applies if the employer does not have a history of offering similar payments which may mean that the employee expects to receive such a payment.

• Anticipated damages for unfair dismissal, or non-contractual pay in lieu of notice on wrongful dismissal.

• Legal costs paid by an employer to the employee’s solicitor which are solely in respect of the settlement agreement and incurred exclusively in connection with the termination of the employee’s employment.

New Employment Termination Payment Tax Rules (April 2018)

In the last Budget, the government pledged to “simplify” the rules surrounding settlement agreement payments, and launched a consultation process.

The changes will be effective from 6 April 2018 and will include the following:

• At the moment, any contractual payments made in lieu of notice are taxable, whilst genuine non-contractual payments in lieu of notice are tax free. Consideration is therefore currently required to see whether an expectation of payment in itself forms a contract. This distinction is to be withdrawn, with all payments in lieu of notice becoming fully subject to tax.

• Any post-employment payments (such as bonuses) will be taxed.

• The £30,000 exemption of income tax will extend to payments made over and above payments in lieu of notice and other taxable amounts.

• The current position is that the proportion of any payment above £30,000 is subject to income tax only and is free of both employers’ and employee’s national insurance contributions. The Government aims to change this so that settlement payments above £30,000 will also become chargeable to employers’ national insurance contributions, but still remain free of employee’s national insurance contributions.

• Foreign Service relief income tax exemptions will no longer to apply. For more information on these changes, please follow the link to the Consultation Paper ‘Simplification of the tax and National Insurance treatment of termination payments: government response and consultation on draft legislation’:


So what does this mean for employers?

This case highlights the importance of ensuring the different components of termination payments are fully considered when entering into a settlement agreement. This careful consideration will ensure that the correct taxation is applied to each component of the settlement agreement payment.

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