Tax and NI on Legal Costs in Settlement Agreements

It is very standard practice (although strictly not a legal requirement) for an employer to pay the employee’s legal costs in relation to legal advice about a Settlement Agreement.

If the employer pays the legal costs directly to the employee who then pays his solicitors, the payment is subject to tax as it is treated by HMRC as a taxable benefit.

However, there is an extra statutory concession that allows for the legal costs to be paid to the solicitor without it costing the employee a penny in tax. However, for this to apply, certain conditions must be met:

1. The money must be paid by the employer to the solicitor (not by the employer to the employee who in turn pays the solicitor).

2. The legal costs must be in relation to advice on the termination of the employee’s employment.

3. The Settlement Agreement must contain a clause providing for the payment of legal costs by the employer.

If these conditions aren’t met, money is given away unnecessarily to HMRC.

See this link from HMRC for more information: http://www.hmrc.gov.uk/manuals/eimanual/eim13740.htm or contact PJH Law for Settlement Agreement Legal Advice.