Ted

Hi, I received an ex-gratia payment in a settlement agreement from my last employment and would like to understand how my total income will be calculated for the same tax year. For simplicity, I made up the numbers below for this question. Since the beginning of this tax year, I worked for company A from Apr to July with a total PAYE income for this period as £50000. Company A and I reached a settlement agreement once my employment finishes with them and I received £40000 as a lump sum ex-gratia payment. As the first £30000 is tax free, let say the tax amount is £10000, £5000 is taxed and I get £35000 after tax. I started a new job with company B in Oct till the end of the same tax year and received £60000 PAYE salary in total for this period. What will my total income for this tax year be? 1) 50000+ 40000 (gross ex-gratia amount) +60000 = 150000 2) 50000 + 35000 (net ex-gratia amount) +60000 = 145000 3) 50000 + 10000 (the taxed amount of ex-gratia amount) +60000 = 120000 4) 50000 + 5000 (the net amount of ex-gratia amount) +60000 = 115000 or the ‘ex-gratia’ payment will not be considered as income. Please correct me if none of the above calculations is correct and let me know how the total income for this tax year is calculated. Thanks.