Settlement agreements, also known as compromise agreements, are legally binding contracts between an employer and an employee that resolve any disputes between them. They typically involve the employee agreeing to waive their right to pursue legal action against the employer in exchange for a monetary settlement.
One question that often arises is whether settlement agreements are subject to National Insurance (NI) contributions. The answer is not a straightforward one, as it depends on a number of factors.
If the settlement agreement includes a payment that is in lieu of notice, then that payment will be subject to NI, just like any other payment of earnings. However, if the settlement agreement is purely a compensation payment for loss of employment (i.e. not including payment in lieu of notice), then it may be exempt from NI contributions.
The key issue here is whether the payment is considered to be “earnings”. If it is, then it will be subject to NI contributions. If not, then it may be exempt.
The definition of “earnings” is broad and includes any payment made to an employee in connection with their employment, including wages, salaries, and bonuses. However, the definition also includes any payment made in connection with the termination of employment, such as payment in lieu of notice.
To determine whether a settlement agreement payment is subject to NI contributions, the employer should seek advice from their payroll provider or accountant. They will be able to review the terms of the settlement agreement and advise on whether the payment is subject to NI.
It is important for employers to understand the tax and NI implications of settlement agreements to ensure that they are complying with HMRC regulations. Failure to do so could result in penalties or legal action.
In summary, settlement agreements may or may not be subject to NI contributions, depending on the terms of the agreement. Employers should seek professional advice to ensure they are complying with HMRC regulations.