Will you have to pay tax and national insurance on the compensation payment?

You will have to pay tax and national insurance on wages, holiday pay, notice pay and any other payment that is considered “earnings”.

The first £30,000 of payment of compensation however is generally tax-free. Such payments are usually labelled ‘ex gratia payments’, ‘termination payments’ or ‘compensation payments’. However, there are limited exceptions. Redundancy payments can also be paid tax free.