Lump sum compensation or is it?

An employee has fallen out with their employer and as well as receiving compensation for loss of his office they are negotiating a lump sum payment in return for giving various undertakings to the employer. What are the tax implications of this payment?

The tax treatment will depend upon the precise nature of the payment. It is possible the payment is in return for entering into some form of restrictive covenant intended to limit his future conduct or activities, in which case the payment will be earnings from the employment. Alternatively, the payment might be in settlement of legal claims being brought or about to be brought by the employee against the employer, for example, in connection with employment law, in which case the payment might escape being classed as earnings. You will need to see the documentation in order to determine the precise nature of the payment.

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