Most awards of compensation made by the employment tribunals are of fairly modest amounts that are unlikely attract any tax: the sum of money that the tribunal orders the employer to pay is the sum of money the claimant ends up with.
However, awards can attract tax at up to 40% and, in some cases, can also be subject to national insurance. In such cases, it is necessary to take the effect of tax into account in calculating the schedule of loss; this is the calculation known as ‘grossing up.‘
If you are the claimant and you have done this calculation, you will probably remember when you get the tribunal’s judgment that the sum awarded is larger than it would otherwise be because you are going to have to pay a substantial amount of tax. But if you are an adviser acting for a client, don’t assume that they have understood the grossing up calculation or remembered what you told them about tax on any award the tribunal might make. At least on first sight, they are likely to read the judgment saying that their former employer has to pay them £X, and think that that means they are going to end up with £X. It will then come as a let-down when they realise that what they’re actually going to get is £Y, substantially less than £X, because quite a lot of it is going to have to be paid to HMRC.
So when you contact your client to tell them the result of the case, tell them the news in the right order. That is to say, don’t tell them:
‘The tribunal has awarded you £X in compensation.
Instead, make sure you have done the tax calculation before getting in touch, so that you are in a position to say something like:
‘The tribunal has awarded you a sum of money that will leave you about £Y after tax.’
That way, by the time they see the judgment telling their employer to pay then £X, they will know what it means in terms of the money they will actually get.