Redundancy tax question
Discussion
I'm about to be made redundant by mutual consent. I understand that the first £30,000 is tax free, but at what rate does any remaining payment get taxed at, 22.5% or the higher rate of 40%? I've been making my calculations based on 40%, but it would be a nice surprise if it were at the lower rate.
Thanks.
Thanks.
The £30,000 limit is for "Compensation" or "Ex-Gratia" payments only. It is NOT in respect of redundancy payments - which are covered by other tax legislation.
If the company is making an "Ex-Gratia" payment to you, then THIS PAYMENT will be exempt from tax up to a limit of £30,000. "Ex-Gratia" means that the employer has no legal obligation to make the payment to you and is paying you out of the kindness of their heart. They should produce written evidence (i.e. a letter) showing the terms under which they are justifying the payment as being "ex-gratia".
Here is what a legal website says -
"Failure to deal with complex redundancy tax issues can end up costing employers dear.
Many employers wrongly assume that up to £30,000 can be paid free of tax to a departing employee. But HM Revenue & Customs (HMRC) is increasingly challenging termination payments, and the courts are looking closely at the facts behind them.
Payments and penalties
The attraction of the £30,000 payment is that PAYE and national insurance contributions (NICs) are not payable on compensation up to £30,000. Only income tax, and not NICs, is due on any compensation above £30,000.
Failure to manage redundancy payments correctly can result in an income tax and NICs bill of £16,140, before any interest or penalties are imposed. Under a new penalty regime, applying to tax returns due to be filed on or after 1 April 2009, penalties can be up to 100% of the tax liability - depending on the employer's".
If the company is making an "Ex-Gratia" payment to you, then THIS PAYMENT will be exempt from tax up to a limit of £30,000. "Ex-Gratia" means that the employer has no legal obligation to make the payment to you and is paying you out of the kindness of their heart. They should produce written evidence (i.e. a letter) showing the terms under which they are justifying the payment as being "ex-gratia".
Here is what a legal website says -
"Failure to deal with complex redundancy tax issues can end up costing employers dear.
Many employers wrongly assume that up to £30,000 can be paid free of tax to a departing employee. But HM Revenue & Customs (HMRC) is increasingly challenging termination payments, and the courts are looking closely at the facts behind them.
Payments and penalties
The attraction of the £30,000 payment is that PAYE and national insurance contributions (NICs) are not payable on compensation up to £30,000. Only income tax, and not NICs, is due on any compensation above £30,000.
Failure to manage redundancy payments correctly can result in an income tax and NICs bill of £16,140, before any interest or penalties are imposed. Under a new penalty regime, applying to tax returns due to be filed on or after 1 April 2009, penalties can be up to 100% of the tax liability - depending on the employer's".
Just to clarify, here is how it works -
your final pay packet would normally be made up -
pay until date of leaving - subject to tax and NI in the normal way
holiday pay for holidays not taken - taxed and NI in the normal way
pay in lieu of notice (PILON) - tax and NI in the normal way
statutory redundancy pay - tax and NI exempt
It COULD include the following -
additional non-statutory redundancy paid as part of the terms of your employment contract - this WOULD be subject to tax and NI
an Ex-Gratia payment - this is tax and NI exempt for sums up to £30,000.
Compensation for loss of office or other payments of this type could be tax and NI free up to unlimited amounts - especially if they were awarded as damages in a court of law.
This whole area is actually VERY complicated and some of the simplistic advice given on certain websites is extremely misleading.
your final pay packet would normally be made up -
pay until date of leaving - subject to tax and NI in the normal way
holiday pay for holidays not taken - taxed and NI in the normal way
pay in lieu of notice (PILON) - tax and NI in the normal way
statutory redundancy pay - tax and NI exempt
It COULD include the following -
additional non-statutory redundancy paid as part of the terms of your employment contract - this WOULD be subject to tax and NI
an Ex-Gratia payment - this is tax and NI exempt for sums up to £30,000.
Compensation for loss of office or other payments of this type could be tax and NI free up to unlimited amounts - especially if they were awarded as damages in a court of law.
This whole area is actually VERY complicated and some of the simplistic advice given on certain websites is extremely misleading.
C O Jones said:
Pay in lieu of notice is not taxable if the contract is broken AND if there is nothing in the contract about PILON and if it is not normally paid.
Russ
As explained above i.e. non-contractual payments.Russ
It is a complicated area and it is important that all the paperwork is got right.
Edited by Eric Mc on Tuesday 29th December 13:37
Bugger - looks like I have paid tax I may not have been liable for!!!
My previous employer sold the business I was working for, I was not TUPE'd across but was retained to manage the sale of the business. At the end of my employment I received:
A pay slip containing:
last months salary
PILON
Payment for staying on to end of employment period
I paid tax and NIC on the above.
I queried the additional payment and was told that there was no way to avoid paying tax on the additional payment, seems I may have been mis informed!
My statutory redundancy was paid outside of the payroll by cheque.
Alicat
My previous employer sold the business I was working for, I was not TUPE'd across but was retained to manage the sale of the business. At the end of my employment I received:
A pay slip containing:
last months salary
PILON
Payment for staying on to end of employment period
I paid tax and NIC on the above.
I queried the additional payment and was told that there was no way to avoid paying tax on the additional payment, seems I may have been mis informed!
My statutory redundancy was paid outside of the payroll by cheque.
Alicat
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