voluntary redundancy payment

bargainaddict

Hi, not sure if this is posted in the right place. My hubby had accepted voluntary redundancy and will leave his job after 12 years next week. He plans to set up his own business in the New Year and begins his training in Dec. Will the redundancy payment be classed as income for this year. If so not sure if we would loose child tax credit. Lots of scary decisions to make at the mo like pension and life insurance. Just got the number for a financial advisor, so hopefully will get to see him soon. Any advice much appreciated.

vanoonoo

hi - to be absolutely sure you will need to get finite advice from an accountant - but I am under the impression it is unearned income and as such will not be taxed when he receives the payment therefore is not likely to affect your child tax credit. It might be worth contacting your loal citizens advice bureau as they may be able to confirm.

hope that helps a little

regards

V

blossom30

I was made redundant some years back and anything over £30,000 was taken into account in that tax year and therefore taxable eg. redundancy payment say £40,000 £10,000 would attract [email="tax@22%"]tax@22%[/email] or 40% whichever bracket you are on. This figure of £30,000 may well have changed (although I think I remember someone quoting on this board recently)

innovate

I think you will probably get the best & most reliable advice from the Inland Revenue. I found them surprisingly helpful - - and since they are the ones doing the assessment in the end, you may as well discuss the matter with them now.

As I understand it:

1. the full redundancy payment counts as income in the current tax year
2. however, the first £30,000 of the redundancy payment are tax free income
3. if your hubby ever worked abroad for his current firm, he might be entitled to additional tax relief on the reduncancy payment (discuss with IR, the rules are complex)
4. generally, firms issue a P45 before they pay the redundancy payment. They are then legally only allowed to withhold 22% tax from the redundancy payment. However, if your husband is in the higher tax bracket (if only due to the redundancy payment), he is still liable for the higher rate tax
5. any tax payable due to higher rate tax will be calculated in the next tax return. If he does his tax return for 2005/6 next September, there is a good chance he will not have to pay until January 2007
6. if there is a liability for higher tax, it seems a good idea to 'park' the tax money straight into a high-interest easy-access savings account, or a cash ISA if you haven't got one yet for this year

Hope this helps - but please confirm with your tax office so you have authoritative advice.

As vanoonoo already said, don't expect an IFA to know the taxation rules. IFAs are in the business of selling you investments and insurances, I wouldn't trust them for taxation advice. Accountants should know the rules, but they usually charge - and you get the best advice for absolutely free from the IR.

Debt_Free_Chick

Redundancy pay is not income - it's compensation for loss of office. However, the tax free limit is £30k and anything over that amount is added to your income for the tax year (the year in which you receive the redundancy amount) for tax purposes.

Be careful if the amount you receive includes pay in lieu of notice and you have a clause in your contract to state that you will receive pay in lieu of notice (PILON), then that amount is not compensation - it's pay, in the normal way, subject to the normal deductions.

So - does the total include PILON? If yes, then this amount is simply x weeks gross pay less x weeks tax & NIC.

Is the remainder (or the total, if no PILON) more than £30k? If so, then £30k is tax free and the balance is added to your income for tax purposes. The company should process the excess over £30k via the PAYE and deduct income tax automatically. If not (and that's naughty!) then there is a special section on next year's tax return for you to enter the details.

HTH

bargainaddict

Thanks for all your advice. The total amount is under £30k. He will get his final pay this week and the redundancy payment including 11weeks PILON and any outstanding holiday etc will be paid mid december. He be be setting up as self employed Jan/Feb.