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The Court of Appeal has decided that a settlement payment for injury to feelings for discrimination by an employer was not taxable. Mr Moorthy agreed a settlement package of £200,000 with his employer which included an amount for injury to feelings for age discrimination. No specific amount was specified at the time, but during the subsequent litigation with HMRC, the parties agreed that £30,000 was for injury to feelings.
 
The relevant tax legislation provides that no tax is payable ‘on account of injury’ to an employee. HMRC argued that injury to feelings did not come within this definition and that the legislation was to capture compensation for personal injury instead. The Court of Appeal disagreed, deciding that it did include injury to feelings and so Mr Moorthy did not need to pay tax on that amount. The tax legislation has however now been changed to specifically exclude injury to feelings, so going forward you should tax these payments.

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