Beware of the redundancy tax trap!

spend2save

BigAlUk - Just want to say thanks for your post and suggest you are not put off by some on here. 25 years in same workplace and not (until redundancy) in 40% tax bracket does not make you a wealthy tax-dodger in my book.

There really is much scope for sharing these tax tips which modest earners can benefit from. The tax credit system is repleat with ways of working the system for your benefit. For example, from £6000 to £24000 (ish) the clawback of benefits equates to an effective tax rate of 70%. If you don't like the idea of paying a higher tax rate than those on £100k, then bung anything over £6000(ish) into a pension, and tax credits makes up 70% of the difference. Let me think... pay 70% tax or have the tax payer fund 70% of my pension. Tough one.

THRIFTY_GIRL

BigAlUK wrote: »

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.

Well I say....lawyers are not tax advisors, people who work at the tax office are not 'qualified' tax advisors, your employer is not a tax advisor...you have been warned:mad:

'Highest Tax Rate' is correct used in the correct context....ie your highest tax rate is 20% for the next £5k of RP, but 40% for the remainder. I suggest you consult a tax advisor if the amount involved is £13k as you will be in for a nasty surprise otherwise it seems.

THRIFTY_GIRL

spend2save wrote: »

BigAlUk - Just want to say thanks for your post and suggest you are not put off by some on here. 25 years in same workplace and not (until redundancy) in 40% tax bracket does not make you a wealthy tax-dodger in my book.

There really is much scope for sharing these tax tips which modest earners can benefit from. The tax credit system is repleat with ways of working the system for your benefit. For example, from £6000 to £24000 (ish) the clawback of benefits equates to an effective tax rate of 70%. If you don't like the idea of paying a higher tax rate than those on £100k, then bung anything over £6000(ish) into a pension, and tax credits makes up 70% of the difference. Let me think... pay 70% tax or have the tax payer fund 70% of my pension. Tough one.

Tax tips are to be shared, but if they are incorrect then best left alone:rolleyes:

Oh yes...and I agree wiith the tax credits system being a complete shambles. As a family with a modest income we earn approx £30k pa and receive a 'generous' £10 per week. Doesn't seem to suit anyone...

BigAlUK

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.

Not very helpful. Consider for instance the advice on the adviceguide org uk website:

To quote:
You don't pay tax on a statutory redundancy payment. You do pay tax on a redundancy payment if it is more than £30,000. You may need tax advice. If the payment is less than £30,000 but more than the statutory amount, you may have to pay tax, depending on the circumstances. This is because some payments you are given when you are made redundant, aren't treated as redundancy payments. The situation is complicated and you should get tax advice.

Most web sites you seek out do not have these "rules on redundancy payments [that] are very clear". If indeed you have access to these very clear rules, it would be more helpful to offer them up in a response rather than to use phrases like "stupid post".

spend2save

TG- Were you suggesting there is something incorrect in my post?

Anihilator

The rules are 30k Tax Free, above that at the standard tax rates the tax payer would pay.

What part of this is difficult.

I think you could well be in for a shock when you realise you werent entitled to keep the full 13k you reclaimed.

You shouldnt be spreading advice which is at best misconceived as plenty of idiots will follow it then be in the !!!! come April./

THRIFTY_GIRL

spend2save wrote: »

TG- Were you suggesting there is something incorrect in my post?

No just a rant at the tax credits system:rolleyes:

And be careful because things aren't always as simple as they seem:p

BigAlUK

THRIFTY_GIRL wrote: »

Well I say....lawyers are not tax advisors, people who work at the tax office are not 'qualified' tax advisors, your employer is not a tax advisor...you have been warned:mad:

'Highest Tax Rate' is correct used in the correct context....ie your highest tax rate is 20% for the next £5k of RP, but 40% for the remainder. I suggest you consult a tax advisor if the amount involved is £13k as you will be in for a nasty surprise otherwise it seems.

You appear to be saying that RP is taxed as income tax, albeit with a higher threshold. In that case, why the phrase "highest rate" in the equation I was given?

spend2save

TG - I share your feelings about the tax credit system. When it works it acts as a total disincentive to progress at work where you get to keep 30% of any pay rise. And , when it doesn't work it takes 2 years trying to sort out an elemental mistake which led to my partner being accessed for £5k in overpayments.

One question for you, is that my partner is being made redundant in a few months with a fairly small payoff of £1250 in redundancy. I am content that this is not taxable, but will it count towards her gross pay, which in turn would lead to a 37% claw back in tax credits? If so, then that will also have to be bunged into the pension.

THRIFTY_GIRL

BigAlUK wrote: »

You appear to be saying that RP is taxed as income tax, albeit with a higher threshold. In that case, why the phrase "highest rate" in the equation I was given?

Correct!!! wish I had a lightbulb here now. Normally it is clear cut because someone with a big RP tends to be high paid and in 40% bracket anyway. It is less common to receive a RP of more than £30k if you are a 20% taxpayer and as you have some payment in 20% and some in 40% this appears to be causing the confusion.

If I were you, I would set aside 40% of the amount above 30k now (less any deduction already taken by your employer). Then do your tax return asap after 5 April. The actual tax due will be less (see my post re the allowances of £500/£3000 pm for tax fvree and 20%) but I'msure you would rather have a refund than have money to pay!!

On another point, sign for JSA...even though its not worth much, or as a minimum ask for the related NI credits.

Hope this helps.