Pay in lieu of notice - tax year query

[dasherdiablo1]

I was chatting with a friend recently whom has taken voluntary redundancy. The company are messing him about a bit and he said they have offered him six months pay plus his redundancy lump sum. No I thought this sounded like he'd got a good deal but he was saying they are messing about with the tax/ NI contributions.

He knows the first 30k of his redundancy is tax free. However because of what he has earnt this year so far he is well into the 40% bracket. His notice starts the first week of Feb 14 and runs in effect to Aug 14 which falls across two tax years. They are saying he need to pay 40% on the whol payment as it is in this tax year, whereas if he were to wait until April he'd obviously get the first 9k free then 20% on the next 32k then 40% on the remainder. This represents a rather large difference in payout - especially as he wants to take time out for travelling so he won't be earning for the first 6months of tax year 2014/15.

I've told him to speak to HMRC tomorrow but he's stressing out and wants to know today. So folks does anyone know the answer?? Al based on this year or split between the years based on when the money would actually be earnt?

Cheers,

DD

[edc]

To be fair this is personal taxation so there is little the company can do to mess you about and it is not a company's responsibility to act as a financial or tax adviser so that you understand your liabilities. If s/he is a 40% rate payer then the balance over £30k is paid at 40%.

[dasherdiablo1]

Sorry; to clarify it is the payment in lieu of notice that he is worried about - he has worked out that by putting it all in this year instead of splitting g it across the two tax years as it would be earnt if he was able to stay in post for the six months then he loses £10k in tax just because of the tax years! The redundancy over 30k is irrelevant as he knows he is well into the higher tax rate anyway. Basically if he decides to not work at all next year because he enjoys the travelling then he loses out on the annual tax free earnings and low rate for 2014/15 that he should be entitled to. Basically it looks a bit like the company are trying to do him (and his colleagues) over by forcing them to pay more tax in this tax year.

[edc]

So your friend wants to be paid next tax year I order to enjoy free time for tax advantageous purposes? That's fair enough but the company has no obligation to assist with this. The payment is typically due on the termination date. If that is before 5th April then so be it. Another possibility is to go on garden leave for a period of the notice and have the termination from 6th April. Of course you will pay tax as usual on salary earnt whilst on garden leave. It's also worth noting that notice pay is not necessarily payable free of PAYE deductions.

[Countdown]

It's PILON so it doesn't run until August I'm afraid. Otherwise he would be on gardening leave (or somesuch). Tax becomes payable when the cash is paid, and from your post it appears that it will become payable in Feb.

There is no benefit to the company to try and bend the rules in order to minimise your friends tax/NI liability, but there IS a risk of HMRC fining them if they are perceived to have done something dodgy.

[pingu393]

As Countdown states PILON is paid before the "holiday", so the tax date is the date he is paid (February).

I wanted to be paid my redundo after 6th Apr, but my employer wouldn't do it, so...

My only advice is to do what I did in similar circumstances and start up a business. Start this business now and get some money spent before 5th April. He is luckier than me as I was made redundant on 30 March, so I only had six days to set up the business and take an order. He has over a month.

I managed to "offset" nearly 10k (10.5k set-up costs v 500 quid income). Perfectly legal and when I asked HMRC if it was OK, they wondered why more didn't do it.