As part of the fallout of the Post Office Horizon scandal, many sub-postmasters and sub-postmistresses are receiving compensation. How are these receipts taxed?
This is a freeview 'At a glance' guide to how Post Office Horizon Compensation receipts are taxed.
Background
Between 2000 and 2014, over 700 sub-postmasters and sub-postmistresses were prosecuted by the Post Office following the introduction of the Horizon computer system in 1999. Ultimately, it was found that Horizon was flawed. Compensation is being paid to those affected, under different schemes.
Tax treatment
The tax treatment of Post Office compensation receipts varies depending on the basis on which the compensation is paid.
Post Office Historical Shortfall Scheme.
- Payments which relate to compensation for personal money used by subpostmasters to replace alleged takings shortfalls are not taxable. Damages for personal loss are also not taxable.
- The element which relates to compensation for loss of earnings is subject to Income Tax in full.
- The Post Office is operating PAYE on the whole sum received, in the year of payment.
- This should be declared via Self Assessment.
- The part which relates to interest on the compensation is also subject to Income Tax.
- The Post Office is deducting 20% tax at source, in the year of payment.
- Any further tax due is paid via Self Assessment.
- The initial awards did not take account of the effect of being taxed as a lump sum and, as a result, some received less than they should have done after tax. It has subsequently been announced by the Government that additional top-up payments will be paid to correct these anomalies. It is estimated that the additional payments will cost £26 million.
- These top-up payments are exempt from Income Tax, Capital Gains Tax and National Insurance Contributions.
- The Income Tax and Capital Gains Tax exemption is provided by SI 2023/772 and the National Insurance exemption by SI 2023/773. Both of these regulations come into force on 1 August 2023.
- Each postmaster will also be able to claim up to £300 to cover the cost of receiving help with filing their tax returns.
- Exempt from Inheritance Tax from 1 May 2020 under SI 2023/1009.
Post Office Group Litigation Order compensation payment.
- This is paid by the Department for Business, Energy and Industrial Strategy or the Department for Business and Trade.
- These are extra payments to those who took part in the original legal action.
- This payment is exempt from:
- Income Tax and Capital Gains Tax under SI 2023/184, from 1 August 2022.
- National Insurance under SI 2023/186.
- Inheritance Tax from 1 August 2022 under SI 2023/1009.
Overturned Historical Conviction compensation payment.
- This is paid by Post Office Limited.
- These are payments made to individuals whose criminal convictions were quashed.
- Exempt from:
- Income Tax, Capital Gains Tax and Inheritance Tax under SI 2023/184, from 22 July 2021.
- National Insurance under SI 2023/186.
Corporate recipients
Legislation included in Finance Act 2024 provides that the ultimate recipient of compensation should be taxed in a similar way to an individual who received the compensation directly.
- This ultimate recipient could be a shareholder, director or employee of a company that was entitled to receive compensation under either the Group Litigation Order Scheme or the Horizon Shortfall Scheme.
This means that:
- Group Litigation Order payments made to companies will be exempt from Corporation Tax with any onward payment being taxed as though it were received directly (i.e. also exempt).
- Horizon Shortfall Scheme payments to companies will be exempt from Corporation Tax, but the onward payment to individual recipients will remain taxable to the extent the original source of compensation was taxable.
- Any amount of the payment which is made to resolve an increase in the rate of taxation will be exempt.
This measure will have retrospective effect from 19 April 2021 when the first payment through the Horizon Shortfall Scheme was made, and from 8 August 2022 when the first payment through the Group Litigation Order to a corporate was made.
2022-23 tax returns
Postmasters in the HSS who do not receive their top-up payment in good time to file their Self Assessment return before 31 January 2024 will not have to pay any late filing or late payment penalty or interest.
See Horizon scandal: tax filing issues
What's new?
Autumn Statement: Compensation Schemes: Post Office Limited
- Legislation will be introduced to exempt top-up payments made under the Suspension Remuneration Review (SRR) scheme and payments yet to be made under both SRR and the Post Office Process Review Scheme from Income Tax, National Insurance contributions and Capital Gains Tax.
- See Autumn Statement 2023
Useful guides on this topic
Tax planning for income at marginal tax rates
At what levels of income do higher marginal rates of Income Tax apply? What tax planning can be undertaken?
Tax Data Card 2023-24
A summary of key tax rates and allowances for 2023-24 and 2022-23.
Savings income: How interest is taxed
What is savings income? How is savings income taxed? What allowances are available?
External links
SI 2023/186 The Social Security (Contributions) (Amendment) Regulations 2023
Government announces tax top-up payments for postmasters affected by the Horizon IT scandal
SI 2023/773 The Social Security (Contributions) (Amendment No. 5) Regulations 2023
Post Office Compensation Update: Statement made on 29 June 2023 (Inheritance Tax)
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