If I leave work due to a disability, will I be taxed on a lump sum payment?

There are two tests that must both be satisfied for a taxpayer to receive his disability pay-off free of tax. Firstly there must be an identified medical condition that disables or prevents the employee from carrying out the duties of his employment and secondly the payment must be made on account of that disability and nothing else.  

If, for example, the employer is unaware of the disability when the employee leaves, then the payment cannot be made on account of disability.

You should keep any independent medical evidence confirming the precise nature of your disability, so that your occupational therapist will be well equipped to help you in this regard.  

Provided you are leaving work on the grounds of disability, then the full amount will be paid tax-free. If it is found that you are not, and the payment represents a payment for terminating your employment early, then the first £30,000 will be free of income tax, provided the payment is not contractual.

David Wesley-Yates, chartered tax adviser at Red & Black Accountancy