In the course of employment litigation you will often have to turn gross salary figures into net.

One way of doing this is to sit down with the tax legislation and work things out. This is boring, time-consuming and difficult.

A much easier solution is to use one of the ready reckoners available online. A good one is listentotaxman.com.

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.

If you are claiming compensation for lost earnings, basic award, pension or other contractual payments, your claim is for your net losses: you are entitled to be awarded what you have actually lost by reason of your employer’s default. However, if your award for losses of this kind totals more than £30,000, you will be taxed on the excess over £30,000 at the rate of 40%. That means that if you simply claim your net losses, you will end up significantly out of pocket.

In these circumstances you need to do a calculation commonly referred to as ‘grossing up’ to arrive at the figure you need to claim so that, after tax, you will be left with a sum that properly compensates you for your net losses.

This calculation is a little daunting at first sight, but if you keep calm it is not really difficult.

You can approach it in one of two ways: you can either understand the calculation properly, or you can follow a formula and not worry too much about understanding why the formula gets you the result you are after. Obviously it is better to understand all your calculations, but if you are short of time and algebra makes you feel sick and panicky, you can get away with the short cut..

The full explanation

Round figures make sums easier, so suppose your net claim for lost earnings etc. is exactly £130,000. If you don’t gross up, you will lose 40% of the excess of this over £30,000 – that is, 40% of £100,000 which is of course £40,000. So you will end up with only £90,000 to compensate you for a net loss of £130,00.

To head this off, you need to claim a sum which, after tax at 40% on the excess over £30,000 will leave you with £130,000. We don’t know what this sum is at the moment, so we will call it X. We want to find out the value of X.

A good start is to write down what we do know about X:

X minus 40% of the amount by which X exceeds £30,000 is £130,000

or to put it another way:

X – 40/100 x (X-£30,000) = £130,000

If you remember a bit about how to manipulate equations from school, you can see at a glance that you are going to be able to find out from this what X is. The key is to remember that the left hand side equals the right hand side: that is what an equation is. So anything you do to one side, you must do to the other side as well. (Think of twins balanced on a see-saw if it helps. Give one twin a 5kg bag of apples to hold, and you have to give the other twin 5Kg of something to hold too. Move one twin 1m closer to the centre, and you’ll have to move the other one 1m towards the centre.)

Start by multiplying out the bracket:

X – 40X/100 + (40/100 x £30,000) = £130,000

so X – 40X/100 + 12,000 = £130,000

then subtract 12,000 from each side:

X-40X/100 = 118,000

then cancel the fraction:

X – 2X/5 = 118,000

then notice that X – 2X/5 is the same thing as X – 2/5ths of X, which is 3/5ths of X

so

3X/5 = 118,000

multiply each side by 5:

3X = 118,000 x 5

divide each side by 3:

X = 118,000 x 5/3

so:

X = 196,66.67

So you need to claim £196,66.67 to compensate you properly for a loss of £130,000.

It is easy to make a slip in this kind of calculation, so always try the calculation in reverse to make sure you have done it right.

If you are awarded £196,66.67 by the tribunal, you will be taxed at 40% on the excess over £30,000, that is on £166,66.67 of it. So to check we have done the calculation right, we need to take 40% off £166,66.67 and then add back the first £30,000.

40% of £166,66.67 is £66,666.67

So taking off 40% we have £166,66.67-£6,666.67 = £100,000

and adding back the £30,000 we get £130,000, which we are pleased to note is the number we first thought of.

The short cut

If your net loss is £A, you need to claim:

5 x (A – 12,000)/3

in order to be awarded a sum that will leave you with £A after tax.

Or if you prefer words: subtract £12,000 from your net loss, multiply the result by 5 and divide it by 3 and the result will be the sum you need to claim.

Remember that you should only apply this formula to net losses (of earnings, the value of contractual benefits etc – not including personal injury, injury to feelings or aggravated damages) where the total exceeds £30,000.