Exemption from Income Tax - IT71
Exemption from Income Tax in respect of certain payments made by employers to employees arising from claims made under Employment Law
- Payments exempt from income tax
- Payments not exempt from income tax
- Out of Court settlements
- What is a relevant Act?
- What is a relevant authority?
- What is a recommendation, decision or determination of a relevant authority?
- Do I need to claim the tax exemption?
- Examples of the tax exemption
- Further Information
Section 7 Finance Act 2004 introduced an exemption from income tax in respect of certain awards made to employees arising from claims for infringement of an employee’s statutory rights or entitlements or failure of an employer’s statutory obligations under employment legislation. The exemption applies to awards made on or after 4th February 2004.
Briefly, the section exempts from income tax compensatory awards made as a result of a claim that an employee’s rights and entitlements in employment law having been infringed or breached through, for example, discrimination, harassment, or victimisation. However, the exemption does not extend to payments made in respect of actual remuneration (for example, arrears of salary or holiday pay).
As regards claims for infringement of an employee’s statutory rights or entitlements or failure of an employer’s statutory obligations under employment legislation, this leaflet sets out:
- the type of payments that are exempt from income tax;
- the type of payments that are not exempt from income tax;
- the tax treatment of ‘out of court’ settlements;
- the meaning of
- a relevant act;
- a relevant authority;
- a recommendation, decision or determination of a relevant authority;
2. Payments exempt from income tax
The tax exemption applies to -
- payments arising out of claims made under a relevant Act following a formal hearing before a relevant authority (or through a mediation process - please refer to paragraph 7 below) on foot of a recommendation, decision or determination by that relevant authority, and
- subject to certain conditions, payments arising out of claims made under a relevant Act made under an ‘out of court’ settlement [that is, an ‘out of court’ settlement which has been agreed between an employee and his or her employer as an alternative to a formal hearing before, and a recommendation, decision or determination of, a relevant authority (please refer to paragraph 4 below)].
3. Payments not exempt from income tax
The tax exemption does NOT APPLY to a payment (however described) in respect of:
- actual remuneration or arrears of remuneration arising from a claim under a relevant Act. For example, arising from:
- the non-payment of wages (for example, a payment in respect of a claim under the Organisation of Working Time Act 1997 for holiday pay);
- the payment of insufficient wages (for example, arrears of remuneration arising from a claim for equal pay under the Employment Equality Act, 1998);
- the termination of an office or employment (for example, a payment in respect of a claim made under the Unfair Dismissals Act 1977-2001) [Note - See Information Leaflet IT 21 - Lump Sum Payments on Redundancy/Retirement available on www.revenue.ie for the possible tax exemptions and reliefs available against redundancy payments];
- compensation for a reduction or possible reduction in future remuneration arising from a reorganisation of a business or changes in work procedures, work methods, or a change of location where the duties of the employment are.
4. Out of Court settlements
Claims concerning the infringement of employees’ rights and entitlements and claims concerning employers’ obligations to employees may sometimes be settled by agreement without referral to a relevant authority. A payment made under such an agreement will also qualify for the exemption where all of the following conditions are met -
- the agreement in settlement of a claim is evidenced in writing;
- the agreement is not between ‘connected persons’ (for example, employer and relative, employer and director);
- the claim would have been a bona fide claim under a relevant Act had it been made to a relevant authority ( for example, sufficient grounds for the claim; claim is within the scope of one of the relevant acts; claim made within specified time limits, etc.);
- the claim is likely to have been the subject of a recommendation, decision or determination by a relevant authority that a payment be made to the person making the claim; and
- the payment does not exceed the maximum amount which could have been awarded under relevant legislation by the Rights Commissioner,the Director of the Equality Tribunal, Employment Appeals Tribunal or Labour Court as appropriate (for example, the maximum amount of compensation arising from a claim made under the Employment Equality Act, 1998 for acts of discrimination cannot exceed a sum calculated as being not greater than 104 weeks pay).
5. What is a relevant Act?
A 'relevant act' means an enactment that contains provisions for -
- the protection of employees’ rights and entitlements; or
- the obligations of employers towards employees.
Examples of such legislation include:
- Employment Equality Act, 1998
- Maternity Protection Act, 1994
- Parental Leave Act, 1998
- Payment of Wages Act, 1991
- Terms of Employment Information Acts, 1994 and 2001
- Minimum Notice & Terms of Employment Acts, 1973 - 2001
- Protection of Young Persons (Employment) Act, 1996
- Protection of Employees (Part-Time Work) Act, 2001
- Protection of Employees (Fixed-Term Work) Act, 2003
- Redundancy Payments Acts, 1967 - 2003
- Organisation of Working Time Act, 1997
- Carers Act, 2001
6. What is a relevant authority?
A 'relevant authority' means any of the following:
- a Rights Commissioner;
- the Director of the Equality Tribunal;
- an adjudication officer of the Workplace Relations Commission;
- the Workplace Relations Commission;
- the District Court;
- an Employment Appeals Tribunal;
- the Labour Court;
- the Circuit Court;
- the High Court.
7. What is a recommendation, decision or determination of a relevant authority?
When an employee makes a claim to a relevant authority on foot of an infringement of the employee’s rights or entitlements under employment law, or on foot of his or her employer’s failure to comply with his or her obligations under employment law, a formal hearing usually takes place before one of the relevant authorities mentioned in paragraph 6 above. Following the formal hearing, the relevant authority will give its decision, make a determination or make a recommendation, as appropriate. The decision, recommendation or determination may include an award of compensation to the employee. This award may, depending on the nature of the award, be exempt from income tax. [Please refer to paragraph 3 for awards not exempt from income tax].
The Employment Equality Act 1998 contains provisions that allow a dispute between an employee and an employer to be resolved through mediation. Where mediation results in an agreement acceptable to both parties, the Mediator draws up the terms of settlement for signature by both parties. A payment made by an employer in accordance with such a settlement will be treated as a payment made on foot of a recommendation, decision or determination by a relevant authority for the purposes of the exemption.
An agreed order made by the Circuit Court will also be regarded as a recommendation, decision or determination for the purposes of the exemption.
8. Do I need to claim the tax exemption?
No. The exemption from income tax in respect of a compensation award made to you by your employer, will, where due, be granted automatically by your employer.
9. Examples of the tax exemption
Examples of the income tax exemption applies are contained in the Appendix.
10. Further Information
This leaflet is for general information only. For further information, phone your Revenue LoCall service.
Please note that the rates charged for the use of the 1890 (LoCall) numbers may vary among different service providers.
If you are calling from outside the Republic of Ireland, please phone + 353 1 702 3011.
Ms A made a claim to the Director of Equality Tribunal against her employer under the Employment Equality Act, 1998, on the basis of alleged discrimination on grounds of marital status, family status and age when her employer failed to promote her following an internal competition.
The Equality Officer held that the employer had discriminated against the complainant on grounds of marital status, family status and age, contrary to the Employment Equality Act, 1998, in the manner in which it conducted its selection process for the relevant position. The Equality Officer ordered the respondent to pay the complainant €20,000 as compensation for the distress suffered by her as a result of the discrimination.
The payment of €20,000 qualifies for exemption from income tax.
Mr B made a claim to the Rights Commissioner against his employer under the Payment of Wages Act, 1991 & Terms of Employment (Information) Act 1994, on the grounds that his employer had dismissed him without notice and had failed to give him any written contract or terms of employment.
Following a subsequent appeal from the Rights Commission to the Employment Appeals Tribunal, the Employment Appeals Tribunal decided that the employee was unfairly dismissed without notice and found that the employer was in breach of its statutory obligations under the Terms of Employment (Information) Act 1994. The Tribunal awarded the employee compensation quantified by reference to 4 weeks wages which amounted to €1,000 in respect of the employer’s breach of the Terms of Employment (Information) Act 1994, and €500 (one weeks gross wages) in lieu of notice.
The payment of €1,000 is exempt from income tax. The payment of €500 in respect of pay in lieu of notice is chargeable to income tax but is covered by the basic exemptions outlined in Information Leaflet IT21 (available on www.revenue.ie)
Ms C made a claim to the Director of the Equality Tribunal against her employer under the Employment Equality Act 1998 on the grounds of alleged discrimination on gender grounds, and on the grounds of victimization.
The Equality Officer found that the employer did discriminate against the complainant in terms of Section 6(2)(a) of the Employment Equality Act 1998. In relation to the complainant’s allegation of victimization, the Equality Officer found that the evidence did not support the allegation. The Equality Officer ordered the respondent to pay the complainant arrears of remuneration in the gross amount of €60,000 and compensation for the effects of the act of discrimination in the amount of €10,000.
Tax Treatment under new legislation
The payment of €60,000 is in respect of arrears of remuneration and is chargeable to income tax. The payment of €10,000 as compensation for the act of discrimination is exempt from income tax.
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