Payment made by an employer as compensation for injury to feelings arising from discrimination falls within income tax exemption


Re: Moorthy v HMRC [2018] EWCA Civ 847

The claimant in this case agreed to compromise a claim for unfair dismissal and unlawful age discrimination which he had brought in the employment tribunal against his former employer, Jacobs Engineering (UK) Ltd. “Mr Moorthy agreed to accept payment of “an ex gratia sum of £200,000 by way of compensation for loss of office and employment”, without any admission of liability by Jacobs, in “full and final settlement” of his existing claims and any other claims (broadly defined) arising out of or connected with his employment or its termination, whether or not such claims fell within the jurisdiction of an employment tribunal”.

This case considered “whether the settlement sum (or any part of it) was taken out of charge to tax by the exemption in section 406 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003), which states that Chapter 3 does not apply to a payment or other benefit provided “on account of injury to… an employee”, the alleged injury being the injury to Mr Moorthy’s feelings sustained in the context of his age discrimination claim”.

Henderson LJ, with whom the other judges agreed, allowed the appeal on the exemption issue, declaring that “£30,000 of the £200,000 paid to him is exempt from income tax under section 406 of ITEPA 2003, being a payment made to him on account of injury to his feelings in the context of his age discrimination claim against Jacobs”.

Claire Darwin and Aidan Wills were involved in this case.