Tax on Redundancy Payment

sylblake

A friend is to receive a redundancy payment of £57,500 before Xmas, they are already in the 40% tax bracket. The first £30,000 is tax free and therefore, they assumed they would be paying 40% tax on the remaining £27,500. However, they have been told by their HR dept that if they do not take the whole payment until January they will only pay 22% tax on the £27,500. This is providing they do not work again before the next tax year in April, if they do one day's work they will be liable to pay 40% on the £27,500.

Does anyone know if this is correct? I would have thought they would have had to wait until the next tax year ie April before paying it to avoid tax.

Any help would be appreciated. Many thanks

Cook_County

22% is deducted if any payment is made after the P45 is issued.

The actual tax your friend will owe or get back will depend on his total income and tax reliefs which of course the HR department cannot know...

sylblake

I have checked & his only income has been his salary, with no other income or interest from investments etc. His tax code no is correct, therefore he is doesn't owe any tax up to this point. If therefore, he gets a payment after the P45 and tax is deducted at 22%, would this be added to the total income he has earned between April - Dec 05 and would he then have to pay an additional 18% at a later date - to make it up to 40% tax deduction. He expects to be made redundant on 31 Dec, get redundancy cheque in January and then he will not work again until the next tax year.
Any advice would be appreciated.

reddevilled

If he only gets 22% tax deducted and he is a HR tax payer, then he needs to notify the Revenue - either through his tax return (in which case tax will be payable on 31/1/07) or by letter.

The lower rate of tax is deducted only because he has already been issued with a p45 NOT because he doesn't have to pay any higher rate tax.

innovate

Pretty bad advice from the HR department, cos it isn't true!

Afraid, he will have to pay the higher rate tax, on his total earnings in 2005/2006 - i.e. including the part of the redundancy pay that's not tax-free.

It is common that reduncancy payments are made after the P45 has been issued. The employer can then, under current tax law, only withhold 22% tax.

Your friend should work out how much TOTAL tax he owes and stick the money into a high-interest instant access savings account. If he does his 2005/2006 tax return sometime next September, there is a good chance he will not have to pay the additional tax until Jan 2007. But he will have to pay eventually...

BTW - has he ever worked abroad for his present employer? There's a little known additional [to the £30K] tax relief available in most such cases

If in doubt, your friend should call his local tax office - they are generally tremendously helpful (once you get through to them....phones seem to be constantly engaged)