Tax on redundancy payment ...

Adbru

Hi Folks,

I am about to be made redundant and would like to be sure of the tax implications

I am a higher rate tax payer so AFAIK the first 30k is tax free and thereafter its 40%....

Is this correct ?? and is there any way to reduce the tax hit (legally of course !! )

thanks in advance.

Adbru

Debt_Free_Chick

First off, what are the different components of the payment?

If part is a payment in lieu of notice (PILON) then that may just be paid in the same way as your salary, with all the usual deductions for tax & NIC (depends on your contract of employment).

After that, then the first £30,000 is tax free and the remainder is taxable - the rate depends on how much you've earned in the tax year of payment.

The only way to avoid the tax is to avoid receiving the payment in the first place e.g. by having part of it paid as an employer contribution to a pension scheme. Whilst this avoids the tax, it also means that you don't receive the money and it's locked away until retirement.

There is no way to avoid the tax and receive the money in your hands.

irnbru_2

Debt_Free_Chick wrote:

After that, then the first £30,000 is taxable - the rate depends on how much you've earned in the tax year of payment.

Sure?

My self-assesment form agrees with OP, first 30K is exempt.

Debt_Free_Chick

irnbru wrote:

Sure?

My self-assesment form agrees with OP, first 30K is exempt.

No

Completely the wrong way around - will edit my post.

Thanks

Cook_County

1. The £30,000 is only due if the payment is non-contractural.

2. Further relief may be due if you have worked overseas.

3. Getting the lump-sum payment made after the P45 is issued will limit the PAYE to 22% so giving you a small cashflow advantage.

Adbru

Thanks for the replys

some of it will be PILON.

some will be for hols that i havent taken this year (pro-rata the annual amount)

As this will be the first pay of the new tax year (end of this month) does that mean:-

the first 30k is tax free,
the next (<5k ) is my allowance for this year and anything over is 22% (up to ~32k) then 40% (I wish !! )



I am currently awaiting my settlement paperwork, the above is my estimate


thanks again

Adbru

Debt_Free_Chick

Cook_County wrote:

3. Getting the lump-sum payment made after the P45 is issued will limit the PAYE to 22% so giving you a small cashflow advantage.

Just to clarify ... presumably the payment will need to be declared for SA and so a higher rate tax liability, if due, will be payable in the future. Hence your comment re "small cashflow advantage"

(I think I understand, but others may need it spelled out, to avoid any confusion).

Regards

Cook_County

DFC - You are 100% correct in reading my mind! For many folks (although perhaps not in this case) the remaining 18% (40% - 22%) does have to be paid over but can sit in the bank for a few months earning interest, so saving money overall!

Adbru

Hi,

I have edited my previous post by removing the figures...

With hindsight it might have looked like i was boasting, dont want to do that

This tax stuff has raised some new questions if I may ?

How does the tax man decide how much to take off each month ??
i.e. In my naivety I thought your first few pays were almost tax free (5k limit)
then your taxed at 22%
then above ~33k its at 40%

but i see no real difference (I think) between my pay-slips late in the taxyear compared with mid taxyear.

is there a monthly threshold where they assume you are going over the 40% limit and tax accordingly ??

sorry if that sounds stupid but then the only stupid question etc etc

thanks

Adbru

jbmagpie

Your "tax Free" allowance is averaged out over the 52 weeks (or in some years 53 tax weeks). This is deduced from your gross pay as is any other allowances, ie Pension etc. The remaining figure is assumed to be that which you will earn each week for the rest of the tax year. In cases were you earn more in one week than the others your are still taxed as if you will earn the higher figure for the rest of the year. However, if your earnings go down the next week the tax you have paid may well mean you pay less that week as the tax paid to date is also projected to the end of the tax year and averaged over the 52 weeks.

Adbru

Hi JBMagpie,

Thanks for that, I think I follow it now

Adbru