Beware of the redundancy tax trap!
Options
BigAlUK
Posts: 16 Forumite
There is a very real danger that many people are falling into a tax trap because of the lack of clear information on how the redundacy pay tax system works and the quirks and side effects the system has.
I've just saved myself a whopping £13k by spotting the "tax trap", so I guess it's a good time to share ... I mean the advice, not the money!
The trap is set when you are paid PILON (Pay In Lieu Of Notice) and you are in grave danger of becoming a 40% tax rate payer in the same tax year. Remember that if you were a 40-percenter last year, you might not be this year - conversely, if you weren't last year, you could be this year. In fact both scenarios can arise from redundancy. Tread carefully. Do the math.
The danger of not discovering the jagged mandibles of this trap come from the wording relating to this PILON. Namely (a) it is TAXABLE INCOME if it was specified as an option in your contract, or (b) it is COMPENSTATION if it was not specified and your employer is paying it in compensation for not giving you notice - i.e. they are saying: go right now, and don't come back. In fact, most of them say "you are terminated" in a suprisingly bad Austrian accent.
The theory is that (b) is actually a preferred and more generous option. Even though it rather oddly represents a breech of contract by the employer! The truth is that it is merely the thick grass concealing the tax trap for the unwary who then, overjoyed, go merrily dancing through that long grass on the way to the bank and then the nearest employment agency without looking. Seriously, guys and gals, some of us really do have a positive attitude to life's mishaps.
However, the PILON payment will be ambiguous to the tax office, and by default they will assume it is TAXABLE PAY. It is unlikely that your employer will tell the tax office up front that it is COMPENSATION. You then have to persuade the tax office that it is - and their job is to not believe you until you prove it. For this you need a WRITTEN STATEMENT from your employer with the magic trap-opening words "compensation in lieu of notice". Get it from them now! Do not delay!
...but that's just the grass - it is not the trap. In fact the trap exists whether or not PILON is part of your redundancy pay. The PILON just makes it wider, or makes your foot bigger, depending on the wording.
Let me explain: if the PILON is considered to be income, then your tax footprint gets bigger. Bigger feet make it more likely to step into the trap. If it is compensation, then it is likely to make the trap bigger - but more about that one later.
Also, the closer your termination date is to the end of the tax year, then the closer you are to the tax trap. If it is at the start of the tax year, the trap is so far away, you are unlikely to step into it. If it is at the end of the tax year, the trap is so close, you have probably already got your foot in it and it is too late. Anywhere in between ... well, tread carefully.
So what does the trap consist of?
TAX DUE = ( REDUNDANCY PAY + PILON - £30k ) x Highest Tax Rate
where Highest Tax Rate depends on what you earned that year. In other words, if you pay 40% tax on JUST ONE POUND in the year, you will have a Highest Tax Rate of 40%. And the tax on your redundancy package has just DOUBLED! This is the hair-trigger mechasnism of the trap. SNAP!
...did your eyes water when you read that? No? Well read it again. This time I will catch your jaw, eyebrows, whatever.
In my case, it meant that if (in the remaining four months of this tax year) I accidentally earned £3.5k - the kind of money the government hands out to jobseekers - the goverment would then demand £13k back from me! ...presumably to pay four other job seekers I'm in competion with - ooh, I've just become a conservative.
Indeed, if I found a job that paid me an astonishing £13k for that four months, I would not be the lucky man I thought I was going to be. You'd think this would be an ideal situation, wouldn't you! But I would have to hand it ALL to the government (every last darned penny) ...ooh, now I'm an ultra right wing conservative.
So - beware.
Me? :rotfl:
Well, I'm off on a four-month £13k holiday, paid for by Her Majesty's government! ...Will send a postcard. ...hmmm, I wonder if there are any jobs in the States, ...or Australia? ...bye ...now, where were those rose-tinted sun glasses? ... had them a moment ago ...
P.S. (to Martin Lewis) If you liked this article enough to want to offer me a job as a journalist, well,... please don't. ...At least, not until April 2010.
I've just saved myself a whopping £13k by spotting the "tax trap", so I guess it's a good time to share ... I mean the advice, not the money!
The trap is set when you are paid PILON (Pay In Lieu Of Notice) and you are in grave danger of becoming a 40% tax rate payer in the same tax year. Remember that if you were a 40-percenter last year, you might not be this year - conversely, if you weren't last year, you could be this year. In fact both scenarios can arise from redundancy. Tread carefully. Do the math.
The danger of not discovering the jagged mandibles of this trap come from the wording relating to this PILON. Namely (a) it is TAXABLE INCOME if it was specified as an option in your contract, or (b) it is COMPENSTATION if it was not specified and your employer is paying it in compensation for not giving you notice - i.e. they are saying: go right now, and don't come back. In fact, most of them say "you are terminated" in a suprisingly bad Austrian accent.
The theory is that (b) is actually a preferred and more generous option. Even though it rather oddly represents a breech of contract by the employer! The truth is that it is merely the thick grass concealing the tax trap for the unwary who then, overjoyed, go merrily dancing through that long grass on the way to the bank and then the nearest employment agency without looking. Seriously, guys and gals, some of us really do have a positive attitude to life's mishaps.
However, the PILON payment will be ambiguous to the tax office, and by default they will assume it is TAXABLE PAY. It is unlikely that your employer will tell the tax office up front that it is COMPENSATION. You then have to persuade the tax office that it is - and their job is to not believe you until you prove it. For this you need a WRITTEN STATEMENT from your employer with the magic trap-opening words "compensation in lieu of notice". Get it from them now! Do not delay!
...but that's just the grass - it is not the trap. In fact the trap exists whether or not PILON is part of your redundancy pay. The PILON just makes it wider, or makes your foot bigger, depending on the wording.
Let me explain: if the PILON is considered to be income, then your tax footprint gets bigger. Bigger feet make it more likely to step into the trap. If it is compensation, then it is likely to make the trap bigger - but more about that one later.
Also, the closer your termination date is to the end of the tax year, then the closer you are to the tax trap. If it is at the start of the tax year, the trap is so far away, you are unlikely to step into it. If it is at the end of the tax year, the trap is so close, you have probably already got your foot in it and it is too late. Anywhere in between ... well, tread carefully.
So what does the trap consist of?
TAX DUE = ( REDUNDANCY PAY + PILON - £30k ) x Highest Tax Rate
where Highest Tax Rate depends on what you earned that year. In other words, if you pay 40% tax on JUST ONE POUND in the year, you will have a Highest Tax Rate of 40%. And the tax on your redundancy package has just DOUBLED! This is the hair-trigger mechasnism of the trap. SNAP!
...did your eyes water when you read that? No? Well read it again. This time I will catch your jaw, eyebrows, whatever.
In my case, it meant that if (in the remaining four months of this tax year) I accidentally earned £3.5k - the kind of money the government hands out to jobseekers - the goverment would then demand £13k back from me! ...presumably to pay four other job seekers I'm in competion with - ooh, I've just become a conservative.
Indeed, if I found a job that paid me an astonishing £13k for that four months, I would not be the lucky man I thought I was going to be. You'd think this would be an ideal situation, wouldn't you! But I would have to hand it ALL to the government (every last darned penny) ...ooh, now I'm an ultra right wing conservative.
So - beware.
Me? :rotfl:
Well, I'm off on a four-month £13k holiday, paid for by Her Majesty's government! ...Will send a postcard. ...hmmm, I wonder if there are any jobs in the States, ...or Australia? ...bye ...now, where were those rose-tinted sun glasses? ... had them a moment ago ...
P.S. (to Martin Lewis) If you liked this article enough to want to offer me a job as a journalist, well,... please don't. ...At least, not until April 2010.
0
Comments
-
The trap is set when you are paid PILON (Pay In Lieu Of Notice) and you are in grave danger of becoming a 40% tax rate payer in the same tax year. Remember that if you were a 40-percenter last year, you might not be this year - conversely, if you weren't last year, you could be this year. In fact both scenarios can arise from redundancy. Tread carefully. Do the math.
Is this post for real here?
I suspect that many of the posters on this forum will not be 40%'ers and will be more concerned about getting basic statutory redundancy and will not be concerned about someone who can obviously afford to be made redundant - assuming that is the case!
I also think it is unwise on a redundancy thread where people are wondering where the money for their next mortgage repayment or utility bill is coming from, to gloat and inform everyone their travel arrangements for the foreseeable future.P.S. (to Martin Lewis) If you liked this article enough to want to offer me a job as a journalist, well,... please don't. ...At least, not until April 2010.
Unlikely - I would imagine ML would rather shove an agitated wasp up his backside!
Prat!0 -
Ohmygod! Someone got out of the wrong side of bed this morning!
First off - a sense of humour in times of stress is strongly advised.
Secondly - who's gloating - if you actually bothered to read between the lines you'll recognise lots of sarcasm and a valid warning. I nearly got caught out and I'm breathing a thankful sigh of relief.
And yes, after nearly getting into a tax trap from redundancy after a quarter century of employment by one company I find myself to be a potential 40-percenter as a result of a redundacy payment. Gosh ain't I lucky.
As for the "prat"? tut tut, takes one to know one.
Should I perhaps add that the same tax trap exists if you are a 10%-er and the redundancy tax trap will apply if you accidentally become a 20%-er. Would you be happier then? (Later edit: as I add later, this is probably not the case, thanks to the £30K tax free bit - so you'd probably be safe from the trap)
And for the record... no not every one who uses this web site is poor, just as not everyone with savings is rich. In fact, most "rich" people these days have big mortgages which become abrupt and serious liabilities in a redundancy situation, when suddenly they realise just how "poor" they are - its savings versus liabilities, isn't it? - and a tax trap of any kind will hit hard.
So, I'm sorry you are so easily offended.0 -
In my case, it meant that if (in the remaining four months of this tax year) I accidentally earned £3.5k - the kind of money the government hands out to jobseekers - the goverment would then demand £13k back from me! ...presumably to pay four other job seekers I'm in competion with - ooh, I've just become a conservative.Me? :rotfl:
Well, I'm off on a four-month £13k holiday, paid for by Her Majesty's government! ...Will send a postcard. ...hmmm, I wonder if there are any jobs in the States, ...or Australia? ...bye ...now, where were those rose-tinted sun glasses? ... had them a moment ago ...
Not gloating eh? I reckon from the above, people will make up their own mind!
There may be genuine tax implications that potentially could affect some people - and yes, this is the forum to highlight that, however, is it necessary to go into great details of your personal travel arrangements and other irrelevant drivel?
BTW - I wud sujest yoo by a dicshinnery from yor nuw found welth as there seems to be speling ishoos!
Now there's sarcasm!0 -
Again, I'm sorry you are so easily offended.
Be nice if you had something constructive to add.
Again: Should I perhaps add that the same tax trap exists if you are a 10%-er and the redundancy tax trap will apply if you accidentally become a 20%-er. Would you be happier then?
(Ah hang on - I'm editing here, as I just realised that in this case you would "thankfully" probably fall below the £30K tax free part of the redundancy payment, so I guess you would be safe).
Indeed, do you feel that Martin Lewis's evident wealth disqualifies him from contributing to a forum on his own site, perhaps?
Sorry - but you are sinking your own boat here.0 -
Sounds like good advice,well explained..assuming its accurate.
Even HM Queen,the richest woman in this fair land..is a moneysaving expert !Feudal Britain needs land reform. 70% of the land is "owned" by 1 % of the population and at least 50% is unregistered (inherited by landed gentry). Thats why your slave box costs so much..0 -
C_Mababejive wrote: »Sounds like good advice,well explained..assuming its accurate.
Even HM Queen,the richest woman in this fair land..is a moneysaving expert !
Thank you - at least someone has the patience to actually read it. As for accuracy, I took legal advice and talked to the local tax office. So from what they told me, this trap is for real. But I guess time will tell. The tax office hinted that I should avoid earning income for the next four months (would you believe it!) and hence to also request a P50 from them as soon as I get my P45. That way they could repay tax immediately. The legal beagle told me to insist on the statement from the employer.0 -
There is a very real danger that many people are falling into a tax trap because of the lack of clear information on how the redundacy pay tax system works and the quirks and side effects the system has.
I've just saved myself a whopping £13k by spotting the "tax trap", so I guess it's a good time to share ... I mean the advice, not the money!
The trap is set when you are paid PILON (Pay In Lieu Of Notice) and you are in grave danger of becoming a 40% tax rate payer in the same tax year. Remember that if you were a 40-percenter last year, you might not be this year - conversely, if you weren't last year, you could be this year. In fact both scenarios can arise from redundancy. Tread carefully. Do the math.
TAX DUE = ( REDUNDANCY PAY + PILON - £30k ) x Highest Tax Rate
where Highest Tax Rate depends on what you earned that year. In other words, if you pay 40% tax on JUST ONE POUND in the year, you will have a Highest Tax Rate of 40%. And the tax on your redundancy package has just DOUBLED! This is the hair-trigger mechasnism of the trap. SNAP!
...did your eyes water when you read that? No? Well read it again. This time I will catch your jaw, eyebrows, whatever.
In my case, it meant that if (in the remaining four months of this tax year) I accidentally earned £3.5k - the kind of money the government hands out to jobseekers - the goverment would then demand £13k back from me! ...presumably to pay four other job seekers I'm in competion with - ooh, I've just become a conservative.
Indeed, if I found a job that paid me an astonishing £13k for that four months, I would not be the lucky man I thought I was going to be. You'd think this would be an ideal situation, wouldn't you! But I would have to hand it ALL to the government (every last darned penny) ...ooh, now I'm an ultra right wing conservative.
Welcome BigAl. I wonder who advised you on this??? cos it aint quite right:rolleyes:
You would only pay 40% tax on your redundancy payment to the extent that you are in the 40% tax band. So if your earnings for the year plus the redundancy take you £1 over the limit then you pay 40% on the £1 and 20% on everything else!!
If you earn £13k in the 4 months to the end of the tax year you will pay 40% tax on this; it makes no difference to the tax on the redundancy payment.
Appreciate you are trying to help but Please refrain from giving advice so confidently if you do not fully understand the system.:p
Now.....are you sure you don't want to take that job thats offering you £13k for 4 months? you will be about £7k better off if you do, or take JSA....with 40% tax you still get about £40 per week:rotfl::rotfl:|(and preserve your NI contributions record:money:)MFiT - T2 # 64start date: 1.7.09 MFW end date: 31.10.17
Start balance: £205,746.51 :eek: Month 18/100..paid 13.50%
Current balance: £177,977.07 (updated 18.12.10)
Target 12.12.12: From £194,000 to £140,000:p
MFI-3 reductions: £16,023/£54,000 achieved (29.67%):j0 -
I'm interested to understand this a little better.
This is going to affect me. I am on a good salary and will be receiving 3 months PiLON when I leave at the end of January. Now I was expecting to be taxed/NI'd etc and have budgeted to lose approx 40% of my PiLON. My redundancy payment alone (excluding PiLON) is just below the tax free threshold
However, what can be done in this instance? Not sure I fully understand? I'll be looking for immediate employment. Is it better to therefore wait until 2010/11 tax year?0 -
THRIFTY_GIRL wrote: »Welcome BigAl. I wonder who advised you on this??? cos it aint quite right
In the first instance, my employer told me the exact calculation they had been told by the tax office to use.
In the second instance, the local tax office confirmed it.
In the third instance, a legal advisor from (company name withheld) confirmed it and then added the bit about getting a statement from the employer about the nature of the PILON.
You are the first person to tell me they are all wrong. In some ways (many ways in fact) I'd prefer it if they were wrong and you are right. One thing is for sure, it is a damned hard thing to get a straight answer for when you try and research it on the net!0
This discussion has been closed.
Categories
- All Categories
- 343.6K Banking & Borrowing
- 250.2K Reduce Debt & Boost Income
- 449.9K Spending & Discounts
- 235.8K Work, Benefits & Business
- 608.8K Mortgages, Homes & Bills
- 173.3K Life & Family
- 248.4K Travel & Transport
- 1.5M Hobbies & Leisure
- 15.9K Discuss & Feedback
- 15.1K Coronavirus Support Boards