Search

Site Search A-Z Index

IN THIS SECTION

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

1. Introduction
2. Payments exempt from income tax
3. Payments not exempt from income tax
4. Out of Court settlements
5. What is a relevant Act?
6. What is a relevant authority?
7. What is a recommendation, decision or determination of a relevant authority?
8. Do I need to claim the tax exemption?
9. Examples of the tax exemption
10. Further Information
11. Appendix

1. Introduction

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 (e.g. 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;

Back to Top

2. Payments exempt from income tax

The tax exemption applies to -

1. 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
2. subject to certain conditions, payments arising out of claims made under a relevant Act made under an ‘out of court’ settlement [i.e. 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)].

Back to Top

3. Payments not exempt from income tax

The tax exemption does NOT APPLY to a payment (however described) in respect of:

1. actual remuneration or arrears of remuneration arising from a claim under a relevant Act. For example, arising from -
   • the non-payment of wages (e.g. a payment in respect of a claim under the Organisation of Working Time Act 1997 for holiday pay);
   • the payment of insufficient wages (e.g. arrears of remuneration arising from a claim for equal pay under the Employment Equality Act, 1998);
2. the termination of an office or employment (e.g. 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 the Revenue website at www.revenue.ie for the possible tax exemptions and reliefs available against redundancy payments];
3. 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.

Back to Top

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’ (e.g. 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 ( e.g. 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, Director of Equality Investigations, Employment Appeals Tribunal or Labour Court as appropriate (e.g. 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).

Back to Top

5. What is a relevant Act?

A “relevant act” means an enactment that contains provisions for -

1. the protection of employees’ rights and entitlements; or
2. 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

Back to Top

6. What is a relevant authority?

A “relevant authority” means any of the following:

• a Rights Commissioner;
• the Director of Equality Investigations;
• an Employment Appeals Tribunal;
• the Labour Court;
• the High Court.
• the Circuit Court;

Back to Top

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.

Back to Top

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.

Back to Top

9. Examples of the tax exemption

Examples of the income tax exemption applies are contained in the Appendix.

Back to Top

10. Further Information

This leaflet is for general information only. You can get further information by contacting:

Locall numbers of the Revenue's Regional Offices

Region	Area Covered	Telephone No.
Border Midlands West Region	Cavan, Monaghan, Donegal, Mayo, Galway, Leitrim, Longford, Louth, Offaly, Roscommon, Sligo, Westmeath	1890 777 425
Dublin Region	Dublin (City and County)	1890 333 425
East & South East Region	Carlow, Kildare, Kilkenny, Laois, Meath, Tipperary, Waterford, Wexford, Wicklow	1890 444 425
South West Region	Clare, Cork, Kerry, Limerick	1890 222 425

PAYE Enquiries from outside Ireland: Calls received on this number will automatically be transferred to our 1890 service 00353 1 702 3011

Employer PAYE Enquiries from outside Ireland: Calls received on this number will automatically be transferred to our 1890 service 00353 1 647 4844

Back to Top

Appendix

Revenue Commissioners
August 2004

PDF Version of IT71 - Exemption from Income Tax (PDF, 57KB)

While every effort is made to ensure that the information given in this leaflet is accurate, it is not a legal document. Responsibility cannot be accepted for any liability incurred or loss suffered as a consequence of relying on any matter published herein.

Back to Top

Print this page