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How to Gross Up Your Schedule of Loss


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What is Grossing Up ?

Grossing up is an important calculation in your schedule of loss to work out how much compensation you should receive after tax, so that you get the correct compensation for your net loss. If your claim for lost earnings is less than £30,000.00 you will not be taxed on it. If your lost earnings comes to more than £30,000.00, the amount in excess of £30,000.00 will be taxed as income. This page provides step-by-step instructions to calculate how much more you need to be paid so that you are left with the right amount after tax.

Compensation for loss of earnings and compensation for loss of pension rights are both calculated on a net basis. The Employment Tribunal (ET) must take care when awarding compensation, that its approach to tax does not put you in either
a better or a worse financial position than if the dismissal had not occurred. This is called the Gourley Principle (British Transport Commission v. Gourley [1955]).

If the Basic and Compensatory Award awarded to you by the ET is more than £30,000 then the amount of money in excess of £30,000.00 will be taxed. For example the Employment Tribunal makes an award of £40, 000.00. The first £30,000 is tax free but tax is applied to the £10,000.00 excess. To ensure that you are not put at a disadvantage by this, the ET will “gross up” any compensation payment that is over £30,000. This is done by adding the amount of tax deductible money back on to your compensation, taking into account your personal tax allowance and tax banding.

The compensation is taxed in the year that you receive it. It is declared by self-assessment  because you have left employment, it cannot be paid by the usual method of PAYE deductions. Here, the Gourley principle requires the tribunal to increase the amount awarded to make sure that, when this income tax is paid you don’t end up in a worse position. This is known as “grossing up”.  National insurance contributions are not deducted. The compensation is grossed up to offset the income tax  that is payable in the year you receive it.


The Procedure

The case of Shove v Downs Surgical Plc [1984] sets out the correct procedure for grossing up. If your award is £30,000.00 or less, your Basic Award will fall into the £30,000 tax-free band under s401 ITEPA 2003. The Compensatory Award will also be taxed under s401 ITEPA 2003 because it is a payment received in connection with the termination of your employment. The Basic Award and Compensatory Award are added together. If the total award is still less than £30,000.00 there will be no tax payment. If the total award is more than £30,000.00 the ET will add the money that will be deducted for tax back on your award to cancel out the tax burden on you.

The ET starts by calculating your net loss. They do this by identifying your net pay in your old job and comparing it (where possible) to the net pay in your new job. After arriving at a net figure, the tribunal  then deducts any part of the £30,000.00 exempt slice that remains available. It then increases the resulting figure by the amount of tax that will be charged and adds that increased figure to your compensation. Interest is calculated separately in compensation for discrimination.


Income Tax

The amount of tax charged depends on your individual circumstances. For some people, compensation is grossed up at a single marginal rate and for others it may mean grossing up in slices using different rates as each separate tax band is
exhausted. If your tax circumstances are complicated, it may be wise to use an accountant.


2019/2020 Gross Income Tax Rates (England and Wales)

Personal Allowance @ 0% on the first £ 12,500
Basic Rate @ 20% on the next slice of £ 37,500
Higher Rate @ 40% on the next slice of £100,000
Additional Rate @ 45% on anything over £150,000

The personal allowance is reduced by £1 for every £2 of income above £100,000. It tapers to zero at income of £125,000.


Grossing Up at a Single Marginal Tax Rate

In certain circumstances, all the taxable elements of your compensation will
need to be grossed up at a single rate. For example, where your gross income
from other sources in the tax year is more than your personal allowance and the
basic rate band, but compensation after grossing up will still leave the gross income in the year below £100,000 (when your personal allowance is affected). In that situation the compensation will be taxed at the higher rate of 40% and your  personal allowance  will be unaffected. The formula is;

grossing up formula for compensation in the employment tribunal
x is compensation before grossing up

𝑦 is compensation after grossing up

𝑟 is the rate of income tax as a percentage of 100.

A. Calculate your compensation based on the net value of your salary and benefits (after Tax and National Insurance Contributions have been deducted).

B. Subtract any part of the £30,000 exemption that remains available.

C. Gross up the amount you get in (B) above to reflect the tax that you have to pay on the excess over £30,000. Use the correct tax rate for your earnings.

D. Add the grossed up figure to your compensation.

The Statutory Limit on compensation is added AFTER grossing up (Hardie Grant London Limited v Aspden [2011]).


Grossing Up at Multiple Rates

The single marginal tax formula will not produce an accurate result, even once taxable income from other sources is taken into account for the following reasons:

A. Different elements of compensation will need to be grossed up at different rates.

B. It is important to make sure the different rate bands are split by reference to the grossed-up figures, not the net amounts.

C. In cases where the grossed-up award will take taxable income over £100,000 the personal allowance will be tapered.

In PA Finlay & Co Ltd v Finlay EAT [2016]  the EAT approved an accountants calculation grossing up £166,318 to £252,574.55 using the 2013/2014 tax
rates. The personal allowance was tapered to zero and £30,000 was exempt
from tax as a termination payment.

The calculation was expressed in the form of a table as follows:

Tax Bandings Gross Tax Net
Up to £32,010@20% 32,010.00 6,402.00  25,608.00
Next £117,990 @ 40% 117,990.00 47,196.00 70,794.00
Earnings over £150,000 @ 45% 72,574.55 32,658.55 39,916.00
Total 222,574.55 86,256.55 136,318.00
Add:tax free amount 30,000.00 0.00 30,000.00
Total award grossed up  252,574.55 86,256.55 166,318.00

The Finlay Table

The following table is based on the one illustrated above and can be used when grossing up for differential rates in England and Wales. 2019/2020 tax rates have been used. The personal allowance has been incorporated, but the effect of tapering
is recognised by including a “New Rate” (“NR”) of 60% within the higher rate band to reflect the fact that each £2 of income in that band will reduce the personal allowance by £1. This has the effect of moving that £1 into the higher rate band of 40%. It follows that for each £1 between £100,000 and £125,000 the effective tax rate is 40% plus 40% of 50 pence, which is 20% of £1. 40% + 20% = 60%. Representing the tapering of the personal allowance in this way means that this table can be used for all grossing up cases for England and Wales taxpayers whether the personal allowance is affected or not. The left-hand side of the table is for details of other taxable income to be inserted.

  Other Income Taxable Tribunal Award
  Gross Tax Net Gross Tax Net
PA (0%) to £12,500.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00
BR (20%) the next £37,500.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00
HR (40%) up to £100,000.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00
NR (60%) from £100,001.00 to £125,000.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00
HR (40%) £125,001.00 to £150,000.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00
AR (45%) £150,001 upwards £0.00 £0.00 £0.00 £0.00 £0.00 £0.00
Totals £0.00 £0.00 £0.00 £0.00 **£0.00 £0.00
** Amount to be added to taxable and non-taxable awards is £0.00

Examples

Grossing Up at a Higher Rate

Ashok was unfairly dismissed from a job paying him a gross annual salary of
£50,000. The ET awards Ashok a basic award of £5,000 and a compensatory award of £38,400.  Total of basic and compensatory awards £43,400.00

The total award exceeds £30,000 by £13,400. £13,400 is the sum that must be grossed up. We will assume that, in the tax year in which Ashok is due to receive the award, his earnings from his new job have already exhausted his personal allowance of £12,500 and the entire 20% basic rate band. The ET’s grossing up calculation will therefore be at a single marginal rate of 40%.

Calculation
• £13,400/60 x 100 = £22,333
• The tax element is £22,333 less £13,400, which is £8,933
• The sum of £8,933 is added to the compensatory award
• The compensatory award is now £38,400 plus £8,933, which is £47,333
So, after grossing up, the ET awards Ashok a basic award of £5,000 and
a compensatory award of £47,333


Grossing Up at a Basic Rate

The facts are as above but, this time, Ashok’s gross earnings in the tax year of
receipt are only £5,000. This means that he has only used some of his personal
allowance of £12,500 and none of the 20% basic rate band. The process of
grossing up would then look like this:

• Ashok’s taxable earnings of £5,000 means that £7,500 of his personal
allowance is available
• This reduces the taxable sum to £5,900 (£13,400 less £7,500)
• The sum of £5,900 is taxed at 20%
• £5,900/80 x 100 = £7,375
• The tax element is £7,375 minus £5,900, which is £1,475
• The sum of £1,475 is added to the compensatory award
• The compensatory award is now £38,400 plus £1,475, which is £39,875.

So, after grossing up, the ET awards Ashok a basic award of £5,000 and
a compensatory award of £39,875.


Grossing Up at Differential Rates

Assume that Ashok was unfairly dismissed from a job paying him a gross
annual salary of £100,000 and that, this time, his earnings in the tax year in
which the award of compensation is to be received are £27,000. The ET has decided that Ashok was dismissed for making a protected disclosure, so the statutory cap does not apply. The ET calculates Ashok’s compensation as a basic award of £5,000 and a compensatory award of £88,500. Total basic and compensatory award is £93,500.00. The total award exceeds £30,000 by £63,500. £63,500.00 is the sum that must be grossed up.

This is what it would look like, using the Finlay Table:

Personal Allowance @ 0% on the first £ 12,500
Basic Rate @ 20% on the next slice of £ 37,500
Higher Rate @ 40% on the next slice of £100,000
Additional Rate @ 45% on anything over £150,000

The personal allowance is reduced by £1 for every £2 of income above £100,000. It tapers to zero at income of £125,000.

  Other Income Taxable Tribunal Award
  Gross Tax Net Gross Tax Net
PA (0%) to £12,500.00 £12,500.00 £0.00 £12,500.00 £0.00 £0.00 £0.00
BR (20%) the next £37,500.00 £14,500.00 £2,900.00 £11,600.00  

 

£23,000.00

 [Note 1]

£4,600.00 £18,400.00
HR (40%) up to £100,000.00 £0.00 £0.00 £0.00 £75,166.00 £30,066.00

£45,100.00

 [Note 2]

NR (60%) from £100,001.00 to

£125,000.00

£0.00 £0.00 £0.00 £0.00 £0.00 £0.00
HR (40%) £125,001.00 to £150,000.00 £0.00 £0.00 £0.00 £0.00 £0.00 £0.00
AR (45%) £150,001 upwards £0.00 £0.00 £0.00 £0.00 £0.00 £0.00
Totals £27,000.00 £2900.00 £24,100.00 £98,166.00 **£34,666.00 £63,500.00
** Amount to be added to taxable and non-taxable awards is £0.00

Note 1: This is the gross figure left in the 20% band after £14,500 has been
used by other income – i.e. 37,500 – 14,500 = 23,000.

Note 2: This is the last applicable band so work backwards with net figures.
The net figure is the Tribunal taxable award of 63,500 minus 18,400 already
allocated to the basic rate band = 45,100. That figure is 60% of the gross figure.
The gross figure is obtained by dividing 45,100 by 60 (i.e. 100 – 40%) and
multiplying it by 100.

• The sum of £34,666 is added to the compensatory award
• The compensatory award is now £88,500 plus £34,666, which is £123,166

So, after grossing up, the tribunal awards Ashok a basic award of £5,000 and
a compensatory award of £123,166. This means the total award is ;

Basic award – £5,000
Compensatory award – £123,166
Total award = £128,166

Of that total award, £30,000 is exempt from tax, and on the remaining £98,166
Ashok will pay a tax of £34,666, leaving him with a net award of £93,500.

Last Updated: [31/08/2021]