'Golden Handshakes'

A ‘golden handshake’ is the term often applied to a settlement at the termination of a contract, wherethat contract has expired, or is a redundancy situation at a senior level as a compensation for lost office.

However, to minimise the potential tax liability, the right to such compensation should not be expressly stated in the contract of employment or it becomes a reward arising under terms of service and assessable for tax in full under Schedule E. As a general precaution, if possible any agreement to make the payment, and its approval by the board, should be done after employment ceases. Where this is not practicable, any reference in any minute or document should be as brief as possible and refer to the payment only as being ‘ex gratia’. Should it be expressed as a consideration for past services, this would almost certainly make it liable to tax under Schedule E.

Tax on ‘golden handshakes’

Following the Finance Act 1988, the first £30,000 of any such payment is free of tax. Thereafter, tax is payable on any additional sum at the person's normal rate.

Compensation for depriving an employee of a company car will be taxed in full as an emolument.

Ex gratia payments

An ex gratia payment is one made over and above the employer's statutory or contractual liability. It may have one of two purposes:

(a) it may be a compensation for job loss

(b) it may be intended to offset any statutory liability which is set against the company in an unfair dismissal case.

Where the ex gratia payment is intended to offset liability, employers should make this clear in the letter outlining the payment; otherwise, it may be discounted by a tribunal.

Payment in lieu of notice will not normally be offset. However, payment made will be taken into account in assessing an employee's loss.