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Beware of the redundancy tax trap!
Comments
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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?
No it is not better to wait. As I said I BigAl is not quite right here.....
Right....
Lets say you leave at the end of Jan (month 10)....
A. If the redundancy payment is below £3ok it is generally not taxable.
B. You have 2 months worth of personal allowance and basic rate (20%) tax band not yet used. Lets say PA is £500 per month and BR is £3000 per month.
So, if you earn nothing in Feb/March then you can set this against any taxable income prior. So, if you are lucky enough to have £7000 of income taxed at 40% upfront then you will receive a refund of £1600(£6000 now taxed at 20% and £1000 now tax free).
If you are in this situation, then basically you will be suffering a tax rate of 40% on any further earnings in the year.
C. As BigAl said make sure you take legal advice on the PILON to try to ensure it isn't taxable.:DMFiT - 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 -
Well I'll have to second her - because as far as I am aware she's right... you would get taxed on everything over the thresh hold at 40% so if you earn £1 over the limit (as the example used here) then on that £1 you will get taxed at 40% - anything below at 20% (apart from the free allowance etc etc etc).DFW Nerd #025DFW no more! Officially debt free 2017 - now joining the MFW's!
My DFW Diary - blah- mildly funny stuff about my journey0 -
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?
I strongly advise that you get advice - and crazy as it might seem, the first best instance is the local tax office. Each case is subtly different and has its own merits, and the situation (in my case particularly bad) might not even be succh a biggy for many. It results from a combination of factors: how close are you to the tax threshold in the tax year of your redundancy, how many months to the end of the tax year, how far over the 30K your redundancy package is and also whether your employer stated in the contract that they could opt to pay PILON, or whether it is a "last minute decision". They all play a part. If it is confirmed that it could be an issue, then unfortunately you have to sit down and do all the math (or pay someone to do it). Unfortunately, waiting until the end of the tax year could land you with a painful benefit of hindsight.
Also someone just suggested that I (and three sources of independant advice) could be wrong. Unfortunately I cannot rule that out, since the end of the tax year hasn't arrived for me yet either.0 -
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!
As a tax advisor I know it is a minefield for the standard employee.
Given the advice I would probably be quite confident that the PILON is tax free.
The bit that looks wrong is that the interpretation of redundancy is taxed at the 'highest rate'. See my post above...hope it makes some sense. PM me if you like with a few numbers/dates and perhaps I can give you some reassurance as to the figures to expect in refund.:cool: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 -
Well I'll have to second her - because as far as I am aware she's right... you would get taxed on everything over the thresh hold at 40% so if you earn £1 over the limit (as the example used here) then on that £1 you will get taxed at 40% - anything below at 20% (apart from the free allowance etc etc etc).
Yes - like I said, I'd like to hope she is right. But unfortunately, REDUNDANCY PACKAGES are not subject to INCOME TAX - they expressly have their own equation and are expressly not "income for PAYE tax purposes". They even have their own tax free limit (£30k). This seperate tax equation is then applied (to quote the advisors) at your highest rate of income tax, whatever that be. Therefore, I'm afraid that according to the advice I was given, she would unfortunately be assuming the package is taxable income and subject to the same rules as income. Remember that tax on savings also has its own tax rules, subtly different from the income tax ones.
Therein lies the rub.0 -
Yes - like I said, I'd like to hope she is right. But unfortunately, REDUNDANCY PACKAGES are not subject to INCOME TAX - they expressly have their own equation and are expressly not "income for PAYE tax purposes". They even have their own tax free limit (£30k). This seperate tax equation is then applied (to quote the advisors) at your highest rate of income tax, whatever that be. Therefore, I'm afraid that according to the advice I was given, she would unfortunately be assuming the package is taxable income and subject to the same rules as income. Remember that tax on savings also has its own tax rules, subtly different from the income tax ones.
Therein lies the rub.
Yes, but the point you are missing is that all of this is income. To be technical here, the redundancy payment is 'specific employment income' for tax purposes, the non-exempt amount would be taxable in the same way as employment income.
Your personal allowances and 20% tax bands also apply to savings income for example. So although a different type of income you may need to pay the extra tax on this.
If you do not understand this, I think the best advice I can give right now is DO NOT spend the extra money...although if you haven't yet received the refund this shouldn't be too difficult.:rolleyes: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 -
Ok. a noddy worked example in the manner it was explained to me:
Normal income at point of termination results in you being (say) £1000 below the 40% threshold.
Employer has confirmed the PILON is compensation, not income, but it will be paid as part of the redundancy package. Lets say 'x' months notice that results in £8,000 PILON. Even though this is for a notice period that lies partially into the next tax year (oh, yeh, I forgot that one) it comes into this years' tax equation through the back door of redundancy package tax.
Redundancy pay (without PILON) is generous because you were there back in 1980 when the company was founded as hence is a whopping £32,000.
Taxable redundancy = 8k+32k-30k = 10k
Highest rate of income tax is however at this time in the year still 20%
Therefore redundancy tax is notionally 2k
BUT. in (say the remaining month of the tax year after your termination) you get income - perhaps even jobseeker's allowance, in excess of £1K.
As a result, your income tax upper rate for THIS YEAR is now 40%
So now, redundancy tax leaps from £2k to £4k, just because you earned more than £1K of actual additional taxable income.
QED0 -
What a stupid post.
The rules on redundancy payments are very clear and overall PILON shouldnt increase your tax from what it would have been if you had worked the full year.0 -
THRIFTY_GIRL wrote: »the non-exempt amount would be taxable in the same way as employment income.
This is what I used to think too, until all three sources of advice all contradicted me, and advised that it is taxed "at the highest rate" (verbatum quote in all cases). The full equation being presented to me was:
(Redundancy + PILON - $30k) x Highest Tax Rate
What can I say? This was the employer, the tax office and a legal advisor who all confirmed this equation and the meaning of highest tax rate.0 -
Anihilator wrote: »What a stupid post.
The rules on redundancy payments are very clear and overall PILON shouldnt increase your tax from what it would have been if you had worked the full year.
A. the rules on redundancy payments are not very clear...the basic principles are but not how they are applied - HMRC like to tax everything they can get their hands on:p
B.Agreed. You have probably been taxed at BR on the full amount because this is the standard practise for post termination payments BigAl. I reccomend you do your tax return ASAP after 5 April and the proof will be in the pudding. HMRC are really not that generous...believe me:rotfl::rotfl::rotfl:or not at your peril:eek:.
I think I have said enough and about to leave the post. Good luck:rolleyes: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
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