Tax Treatment of Settlement Payments in Employment Disputes

11/04/2025

If you're involved in a workplace dispute and reach a financial settlement with your employer, it's important to understand how that payment will be treated for tax purposes. Some payments can be tax-free, but others are taxable depending on what the payment is for.

1. Tax-Free Compensation – When Is It Possible?

If your settlement relates to a genuine dispute with your employer — such as unfair dismissal, discrimination, bullying, or breach of contract — then part or all of the payment may be tax-free.

This is covered under Section 192A of the Taxes Consolidation Act 1997 and related provisions.

To qualify for tax-free treatment:

  • There must be a genuine legal dispute.
  • The payment must be made to settle or avoid litigation (e.g., a claim before the Workplace Relations Commission (WRC) or the courts).
  • The payment must be ex gratia — meaning it is not a contractual entitlement, salary, bonus, or wages.

You may qualify for the following tax exemptions:

  • A basic exemption of €10,160 + €765 for each full year of service (Section 201 TCA 1997)
  • A Standard Capital Superannuation Benefit (SCSB) — a more favourable calculation based on your earnings and service
  • An additional €10,000 exemption if you haven't received a lump sum from a pension

These rules are designed to allow compensation for loss of employment or injury to feelings to be paid without deduction of tax — as long as the payment isn't a form of back pay or future pay.

2. Taxable Payments – What Is Always Taxed?

Some parts of a settlement are always taxable. This includes:

  • Wages or salary owed
  • Holiday pay
  • Pay in lieu of notice (if your contract allows or expects it)
  • Bonuses or commissions
  • Any amount that is a replacement for normal earnings

These are treated as income and will be taxed in the same way as your salary.

3. Why Filing a WRC Complaint Can Help

If you file a complaint with the WRC, this makes it clear there was a real legal dispute and strengthens the argument that a settlement is to avoid or resolve litigation. This makes the tax-free status much easier to justify.

If you don't file a complaint, Revenue may ask:

  • Was there a real legal risk to the employer?
  • Was the payment compensation or just a goodwill gesture?
  • Why is this payment being made?

Without clear legal context, Revenue may treat the entire payment as taxable.

4. What to Watch Out For

  • Make sure the settlement agreement clearly states that the payment is being made to settle a dispute.
  • Separate the amounts into taxable and non-taxable parts in the agreement.
  • Ask your advisor to refer to the legal basis of the dispute (e.g. Unfair Dismissals Acts, Employment Equality Acts).

5. Key Legal References

  • Section 192A of the Taxes Consolidation Act 1997 – Exemption for payments made under statutory dispute resolution
  • Section 201 of the Taxes Consolidation Act 1997 – Tax-free payments on termination of employment
  • Revenue Tax and Duty Manual – Part 05-05-19 – Guidance on ex gratia payments and settlement payments

Every case is different. If you're unsure how your settlement might be taxed — or whether you should file a complaint to protect your position — it's a good idea to seek advice.

For support and guidance, book a discovery call with workplacedisputes.ie

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