Redundancy payment and tax

brian1042

I am single and I have the possibility of voluntary redundancy. I currently pay tax at the higher rate of 40%. The idea is that I finish my employment on 31 March 2009 and all salary payments would be paid by then. My redundancy payment of £100,000 would be on 6 April 2009, and this would be the only payment I would receive then. I understand that £30,000 is tax free.
If I am unemployed on 6 April:

1. Can I use the whole of my 2009-10 personal allowance against the redundancy payment?
2. Would the taxable amount be taxed at marginal rates of 10% for the first £2,230, 22% from £2,230 to 34,600, and 40% for the remainder, or will I have to pay 40% tax on all of it?

Debt_Free_Chick

The payment will be made by your employer via PAYE so you will have no control over the way your Personal Allowance is offset. Yes - the first £30k will be tax free and then 1/12th of your PA will be offset against the remaining £70k so, no, the whole year's PA will not be offset.

If you take up new employment, then by the end of the next tax year, everything should even out, as your P45 should include the £70k and the tax paid on it.

If you don't take up new employment, you should contact the tax office and get a refund of any tax due.

HTH

Debt_Free_Chick

Two things to check

Whether or not the £70k includes a PILON (payment in lieu of notice) if so and it's contractual, then any PILON is "pay" and taxed accordingly.

Whether your employer is definitely going to process the PAYE on the termination in the next tax year and not this one.

HTH

jimmo

I seriously doubt that you can achieve your wishes by having a date of leaving of 31 March.
If your employer insists that you leave at the end of a month you would be much safer going at the end of April.
Whilst debt free chick has correctly pointed out the potential pitfall of PILON being a contractual payment, as opposed to compensation I think if you are getting a £100k payout the chances of the compensation element being less than £30k seem pretty remote. If that is the case, you will actually get £30k tax free and the status of any PILON will not really matter.
However you really should analyse the whole make up of the £100k.

Moving on to your question, there are 2 things to consider.
1) How will your termination payment be taxed under PAYE?
2) How will your termination payment actually be taxable?
The answers may be very similar but there can be differences for you.
In my personal and professional experience the normal procedure is that your final salary payment is paid on your last day of service. No problems with that and it is what you anticipate.
However the termination payment is normally paid the next day. I think that technically the employment terminates on the first day you are no longer an employee rather than the last day that you are an employee but I have never actually had to address that as a point of law.
I get the feeling that if your employer sits on your termination payment for 5 or 6 days until 6 April he will be doing so illegally but, that is a matter of general, or employment law rather than tax law. I am afraid I am no longer up to speed on the PAYE regulations and cannot prove that anything may be wrong.
However, I do feel able to prove that if your last day of service is 31 March your termination payment will be assessable for the current year and you will be liable to higher rate tax on the taxable element. Take a look at the following 2 links.
http://www.hmrc.gov.uk/manuals/eimanual/eim13100.htm
http://www.hmrc.gov.uk/manuals/eimanual/eim13110.htm

brian1042

Thanks for all that. There is no PILON. The £100,000 is a negotiated redundancy payment (only). The leaving date is negotiable, so could be 5 April, with the redundancy payment made on 6 April. Does anyone know the answer to my marginal tax question? Thanks.

ceeforcat

Marginal tax question previously answered by debtfree chick. Only thing she did not mention was the fact that tax is at 20% and then 40% only (10% band and 22% band no longer exist)

brian1042

I am sorry but I do not see that answer anywhere. I realise I may be slow here but would you be kind enough to quote that part for me. Really sorry if it is obvious.

I should now restate the question, as you have pointed me to the new rates of 20% and 40%.

Would the taxable amount be taxed at marginal rates of 20% for the first £37,400 and 40% for the remainder, or will I have to pay 40% tax on all of it?
Thanks.

ceeforcat

I calculate after first £30000 tax free amount:

6035/12 or £512 tax free

next £34800/12 or £2900 at 20%

balance at 40%.

Total £27420. If you can state that you will not be working before 5/9/10 - ask tax office for form P50 to claim balance of personal allowances and 20% band for that tax year. Otherwise - your P45 will need to be given to any new employer who will process any refund due evenly throughout the tax year.

brian1042

My calculations are as follows.

2009-10 Personal Allowance £6,475
Basic Rate 20% £0 to £37,400
Higher Rate 40% Over £37,400

Source: http://www.hmrc.gov.uk/rates/it.htm

£
Payment 100,000
Tax Free 30,000
Personal Allowance 540
Taxable 69,460
Tax Basic 7,480 (20% of £37,400)
Tax Higher 12,824 (40% of (£69,460-£37,400)
Tax Total 20,304
NET 79,696

This is a big difference in the end. Not sure if I have gone wrong.

ceeforcat

Fair enough - I have used 2008/09 tax rates. However you state that you will receive the payment on 6th April 2009. At that point you will only be entitled to receive 1/12 of the personal allowance for that year and 1/12 of the 20% band before you pay HR tax. My calculations, when you transpose the 2009/10 figures result in tax due of:

£30000 tax free

£540 free pay

£3116 @20%

Balance at 40%

brian1042

Ah! Thank you so much. I didn't realise I could only use 1/12 of the 20% band before paying higher rate tax. I see where I have gone wrong. Very helpful.