Tax on Ex-Gratia Retention Bonus

mazzlestar27 · 30 November 2017 at 11:41AM

Hi all,

Posting on behalf of a friend who is having some trouble with her redundancy and retention bonus payment. Her payslip breaks it down as follows:

Basic Pay (November): £1,551.00
Back Pay (Holiday accrued but not taken): £214.75
Ex-Gratia (Retention Bonus): £10,856.98
PILON: £1,789.60
Redundancy (Statutory): £1431.68

PAYE tax on the above? £4875.46

The retention bonus is for continuing to work through 2017, as they were told about the closure of the office late in 2016. She has contacted her employer about this, as she was not expecting to pay tax on the Ex-Gratia payment. This was the response:

"With regards to the items on your payslip, the following have not been deducted for tax and NI contributions:

Redundancy

- With regards to the items on your payslip, the following have been deducted for tax and NI contributions:

Basic pay (November 2017 salary)

Back pay (accrued but untaken annual leave up to 30 November 2017) - contractually entitled

PILON (pay in lieu of notice) - 5 weeks notice pay, not required to work

- Where I think your main query rests is with the payment type 'Ex Gratia.'

This is the pay type that has been utilised to make your Retention Bonus payment. The reason it has been deducted for tax and NI is because your Retention Bonus is 'reward for work done' in other words you were contractually entitled to receive 'x amount' for continuing to work until the day the office closes on 'x date.' Therefore it would not be classified as a non-contractual payment and would not fall into the bracket of the £30k tax-free termination payment.

If you do still disagree with the tax and NI deductions that the company pay to HMRC, this is something that you would be able to discuss with them and look to claim back directly with HMRC."

Can anyone help us out with where exactly she stands on this and if it's worth going to HMRC? There's an awful lot of conflicting info out there about Ex-Gratia payments!

Thanks

Maz

antrobus · 30 November 2017 at 1:06PM

mazzlestar27 wrote: »

......

The retention bonus is for continuing to work through 2017...

This is the pay type that has been utilised to make your Retention Bonus payment. The reason it has been deducted for tax and NI is because your Retention Bonus is 'reward for work done' in other words you were contractually entitled to receive 'x amount' for continuing to work until the day the office closes on 'x date.' Therefore it would not be classified as a non-contractual payment and would not fall into the bracket of the £30k tax-free termination payment.

Isn't that the answer?

It is a payment for work done and is therefore subject to PAYE.

Tasha2502 · 30 November 2017 at 3:32PM

But even if that’s the case surely the rest of the pay shouldn’t have been taxed. The company hadn’t informed HMRC that there was a redundancy pay and so the whole lot has been taxed? And wouldn’t that be down as bonus on the wage slip not ex gratia which is tax free?

antrobus · 30 November 2017 at 4:15PM

Tasha2502 wrote: »

But even if that’s the case surely the rest of the pay shouldn’t have been taxed. The company hadn’t informed HMRC that there was a redundancy pay and so the whole lot has been taxed? And wouldn’t that be down as bonus on the wage slip not ex gratia which is tax free?

Redundancy was not it seems taxed.

mazzlestar27 wrote: »

"With regards to the items on your payslip, the following have not been deducted for tax and NI contributions:

Redundancy"

The Ex-Gratia (Retention Bonus) was a payment for work done.

getmore4less · 30 November 2017 at 5:18PM

Retention pay is contractual taxable pay.

They could have been smarter and done it as enhanced redundancy.

mgdavid · 30 November 2017 at 7:36PM

the tax does look rather high! without knowing her PAYE code one can't comment more accurately.
Don't forget a fair chunk will have been taxed at 40%, and if she doesn't earn too much in the remaining 4 months of the year she will probably get a large amount back.
But yes, as worded the Retention bonus is taxable. They haven't done her any favours - but then they probably aren't smart enough to know how (that's why they work in HR).

IanSt · 1 December 2017 at 10:06AM

What information was your friend given when she was originally informed that she would be in line to receive the retention bonus?

If she has some written down information that said it would be done in a tax-free way then she has something to work from, but if not then there's probably not a lot she can do.

As per mgdavid she will get some money back from the hmrc if she has overpaid on tax - which she almost certainly will have.

To find how much money she is likely to get back she will need to go to a paye calculator like https://listentotaxman.com and calculate how much tax she would pay over a year and then look to how much has actually been taken from her on her salary slips over the tax year.

jobbingmusician · 2 December 2017 at 11:25AM

If this was VOLUNTARY redundancy, I agree. If she has it in writing that this is a redundancy payment, then she should write to the employer saying that she was promised a RP, which is non-taxable, and this is the basis on which she accepted redundancy.

If the redundancy was forced on her, then sadly the employer is correct, if mean, to treat it as payment for work done. As previous posters have pointed out, some of the deduction may be returned if her employment for the rest of this year is not taxable at 40%.

mazzlestar27 · 2 December 2017 at 11:33AM

Thanks all, that's really helpful

she has been in touch with HMRC who think she HAS been over taxed by at least £2k, but she won't see that til April. I'm trying to convince her to see that as an unexpected Easter bonus &#55357;&#56834;

I thought it seemed odd that they'd done it in this way, seems like they've kind of deliberately screwed her over! I'm in the car (not driving I promise) right now so will respond properly later, but thanks so much for everyone's responses so far!

She's a sales administrator with a salary of less than £20k so the tax man ought to be charitable come April!

Tax on Ex-Gratia Retention Bonus

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