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Settlement Agreement and UC
I have tied my brain in knots trying to get my head around this.
Client who is currently on UC with LCWRA and therefore no work related requirements (and therefore not liable to sanctions). Employer has invited client to discuss a Settlement Agreement to give up her job rather than return to it if client becomes well enough to do so.
1) Is a settlement payment treated as earnings in the month it is paid? I can’t find an exception that would suggest it isn’t treated as earnings. Depending on the size of the payment this is likely to result in a NIL award for the assessment period requiring a rapid reclaim.
2) That then brings us to surplus earnings. If the award was NIL and there are excess earnings it appears that these will be taken into account which could then result in a further NIL award, again requiring rapid reclaim. Repeat as often as necessary until an award is payable. There is a temporary excess earnings disregard of £2,500 until April 2019. I think this disregard is applied every month the calculation is repeated so this might not be too bad if process is completed quickly for this particular client. The disregard drops to £300 from April next year so will be a much bigger issue from then on.
I assume client also gets the benefit of the work allowance (because in LCWRA) in each assessment period calculation .
3) Alongside this there is the principle that after the month in which it is received income that has not been spent is treated as capital. It appears therefore that a sum of money can fall to be treated as both surplus earnings from a previous assessment period and capital which (assuming it is below £16,000 so doesn’t end the claim) could give rise to notional income. This means that it is effectively taken into account twice, albeit in different ways.
Does anybody have any thoughts on this? Am I missing something?
Client obviously wants to understand implications of agreeing to anything with employer and I am unsure what to advise them. Taking money from employer may make no sense if it is effectively going to be cancelled out by loss of benefit at a time when client just wants to focus on getting well.
I’ve been looking at ADM:
H3301 onwards dealing with surplus earnings.
H1050 Income becomes capital if it has not been spent by the end of the assessment period after the one in which it was received.
It might be worth checking if the settlement payment is taxable - if it’s not it doesn’t count as earnings - see reg 55(2)(b) of the UC Regs 2013
Thanks Daphne. I did spot that but I don’t know what is proposed yet. My (brief) reading around the subject suggested that there are now only limited circumstances in which a settlement agreement would not be taxable - I think HMRC may have tightened the rules. The only relevant bit I could see is limited income tax exemptions for statutory redundancy payments and in this case I don’t think client is redundant because the job is not ending it’s just that claimant and employer don’t particularly want to work together again!
Settlement agreements are clearly complex and well beyond my scope! If anyone has a view about my reading of how the payment will be used for calculation of UC if not exempted I would be grateful.
I have received the following suggestion via email from someone who is unable to post directly to rightsnet:
“I saw your thread concerning a settlement agreement and the double counting because of the surplus earnings rules. I agree with your analysis, and would expect DWP to treat it as you describe, despite the clear unfairness.
One option which may be worth considering (if your client is able to time things correctly), is that it may be worthwhile for them to end their UC award beforehand so as not to be caught by the surplus earnings rules.
They would have to end it during the AP before the money is paid to them, which would mean losing that month’s benefit. However, depending on the sums involved, it may be worthwhile.
It’s very possible that the UC computer system may be set up in a way that even withdrawing from UC in the AP in which they receive the settlement may stop the surplus rules from applying, but I don’t think it’s legally good enough.”
It’s very possible that the UC computer system may be set up in a way that even withdrawing from UC in the AP in which they receive the settlement may stop the surplus rules from applying, “
I don’t think so; 54(a)(1)(c) is clear. The withdrawal suggestion is a good idea though and 54(a)(1)(b) supports it.
Surplus earnings
54A.—(1) This regulation applies in relation to a claim for universal credit where—
(a) the claimant, or either of joint claimants, had an award of universal credit (the “old
award”) that terminated within the 6 months ending on the first day in respect of
which the claim is made;
(b) the claimant has not, or neither of joint claimants has, been entitled to universal
credit since the old award terminated; and
(c) the total earned income in the month that would have been the final assessment
period for the old award, had it not terminated, exceeded the relevant threshold.
It might be worth checking if the settlement payment is taxable - if it’s not it doesn’t count as earnings - see reg 55(2)(b) of the UC Regs 2013
When I was an employment adviser I dealt with a fair number of settlement agreements (as they are now called). Payments under settlement agreements are almost always treated as a “Payment on Termination of Employment” and come under Chapter 3 of the ITEPA 2003. These are the same rules that cover redundancy payments (and if more than £30,000 the excess is taxable).
For UC they would are excluded from earnings by reg 55(2)(a) (rather than reg 55(2)(b)) of the UC Regs 2013 and what is received should be treated as capital rather than income.
It might be worth checking if the settlement payment is taxable - if it’s not it doesn’t count as earnings - see reg 55(2)(b) of the UC Regs 2013
When I was an employment adviser I dealt with a fair number of settlement agreements (as they are now called). Payments under settlement agreements are almost always treated as a “Payment on Termination of Employment” and come under Chapter 3 of the ITEPA 2003. These are the same rules that cover redundancy payments (and if more than £30,000 the excess is taxable).
For UC they would are excluded from earnings by reg 55(2)(a) (rather than reg 55(2)(b)) of the UC Regs 2013 and what is received should be treated as capital rather than income.
The UC reg you refer to mentions Parts 3 and 4 of ITEPA whereas the chapter in ITEPA dealing with “Payments on Termination of Employment” appears to me to be in Part 6 so seemed to me not to be covered by the UC exclusion.
I now see that the UC definition of employed earnings refers to section 7(3) of ITEPA which does not include Part 6 within the definition of general earnings. I think therefore the two sub paragraphs a) and b) dealing with exclusions are not applicable anyone because Payments on Termination of Employment are not included in the definition of earnings in the first place!
So a settlement agreement is likely to include various contractual payments, in this case outstanding holiday pay and possibly pay in lieu of notice both of which I believe would be taxable and therefore count as earnings for UC but could also include a non contractual payment which would be tax exempt and excluded from be treated as earnings for UC. Hope I’ve got that right.
There is then of cours the matter of what DWP see through RTI and evidencing to them that parts of what they may see should be ignored - that should be fun.
I’m standing by the opening remark in my initial post “I have tied my brain in knots trying to get my head around this”.
[ Edited: 23 Oct 2018 at 10:17 pm by Ianb ]