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Grossing up and the statutory cap

In Hardie Grant London Limited v Aspden, the EAT has made it clear (if it wasn’t already) that the statutory limit on the amount of compensation that can be recovered for unfair dismissal must be applied after, not before, any ‘grossing up’ calculation has been done. As usual, I’m indebted to Daniel Barnett for his email alert on this case.

Grossing up is the calculation that you do to work out what you need to receive so that, after tax, the part of your award that you get to keep properly compensates you for your net losses. If your claim for lost earnings amounts to less than £30,000, you don’t have to worry about it: you won’t have to pay tax on it anyway. But if you are claiming more than £30,000 in lost earnings, although the tribunal will award you your net losses, the amount by which your award exceeds £30,000 will still be liable to be taxed as income.

It’s not really difficult to calculate how much more you need to be paid in order to be left with the right amount after tax – but it is quite fiddly, and will depend in part on your income for the relevant year from other sources. If anyone knows of a set of good, clear step-by-step instructions for this calculation (or better still, an online calculator that asks you for the relevant information and then spits out the answer), please comment.

4 comments

  1. monkeychicken

    its worth noting that in conducting negotiations, if the sum is for injury to feelings, there is no tax payable. so settlement a tactic would be to ask more for as injury and less for loss of income. I know this from experience on a settlement of over £120k, I had to pay nearly 40% tax and later found out someone got around £90k but it was classed as injury so paid no tax. This is settlement, not award, just to be clear.

  2. Giles Robertson

    Note that the question of taxation of injury to feelings awards may be rather more vexed (see Harvey’s at BII [241], Orthet Ltd v Vince-Cain [2004] IRLR 857 and Yorkshire Housing Ltd v Cuerden (UKEAT/0397/09)). It would not seem safe to assume that every award might enjoy such generous treatment.

  3. Twain Brighton

    Best calculated with excel worksheet:
    eg. A1 = “#-30000” (take away the 30 000, tax free. from sub-total)
    A2 “=A1*(66.666666/100)” (here we find percentage required)
    A3 “=A1+A2” (add A1 and A2 together to get the full figure with this %)
    A4 “=A3*(40/100)” (find 40% of this figure, what is taxable)
    A5 “=A3-A4” (subtract the percentage amount from the figure in A3)
    A6 “=A2-A5” (subtract the balance in A5 from A1, this should be £0.00)
    If it is not 0.00, you only need to adjust to top figure, I have put in 66.666666 in the A2 calculation. The formula will work itself out automatically until you get A6 = £0.00 and this is the required percentage.

  4. Matt

    To clarify Twain’s suggestion for non-excel geeks:

    Say the award is £100,000 and we ignore injury to feelings complications:

    Take off the £30,000 tax free = £70,000.
    Now you want the number that would result in £70,000 if you applied 40% tax to it.
    In algebra this is: x – (0.4)x = £70,000.
    Rearranging the formula gives x = (£70,000 / 0.6)
    So the number you want is £116,666.67.
    You can test this result by taking off 40% of your result.
    For the total award you then add the £30,000 back on to give a total grossed up figure of £146,666.67.

    Of course this assumes a 40% tax rate across the board and that is probably wrong, since a certain amount will be at a lower rate and indeed for higher awards some might even be at 50% so you’ll have to adjust for those considerations.

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