Q: I have recently received a sum of money to cover my loss of earnings. Is this taxable?
Financial loss allowances are also known as payments for loss of earnings, people who receive these can include persons serving as jurors in Great Britain, members of certain local authorities and similar bodies in Great Britain, and persons attending trade union meetings.
The tax treatment is different depending on whether you are an employee and you earned no more than your normal earnings, you are an employee but received more than your normal earnings or if you are self-employed.
If, as an employee, you receive no more than you would have done but for the loss then there is no tax or national insurance contributions due and no reporting requirements associated with the payment.
For example, Mr Brown earns £300 net a week through his employment. He is called up for jury service and his employer does not pay him while he is absent for four weeks from his work. Mr. Brown claims for £1,000. As the payment is not greater than his lost earnings it is not taxable.
If, again as an employee, you receive more than you would usually earn through your employment, then the excess amount is treated as earnings. The excess is subject to a deduction of tax and Class 1 national insurance contributions under PAYE in the normal way (even where the payment is not made by the employer on behalf of the third party).
For example, Mr White is a teacher who is on the committee of a national teachers’ union. In this capacity he is required to attend a conference for a week. His employer does not pay him in his absence. The union pays a standard £600 a week to all attending committee members whereas his salary for the week would be £475.
In this case the first £475 of the amount paid by the union is not taxable as it is equivalent to his normal salary. However, the £125 excess over his normal salary is taxable and his employer is responsible for operating PAYE in respect of that £125, deducting income tax and Class 1 national insurance contributions as normal through their payroll system.
If you are self-employed the amounts received are made to fill a hole in the profits of your trade, profession or vocation and are therefore taxable receipts of your business. Payments that do not “fill a hole in the profits” for example subsistence payments are not taxable receipts as they only cover personal expenses. The loss of earnings payment is then included in the figures on your tax return and taxed through the self-assessment system.
Ben Chaplin is managing director of Taxwise