Voluntary Severance Advice

jamminca69

Hi all

Just looking for some advice before i head into a meeting with HR this week regarding the Voluntary Severance scheme i previously expressed an interest in.

Does anyone have any tips for any questions to ask or specific things to note down? I posted details of the scheme http://forums.moneysavingexpert.com/showthread.html?t=2163621 (clearly now having seen this forum it was in wrong place) but am now worried about potential taxation problems stemming from receiving this extra money. I understand the first £30,000 will be tax free but am more concerned about affects on end of year tax etc etc and being charged higher rate of tax on any future earnings?

Also given the verbal agreement that seems to exist with voluntary severances, how likely is it that the company will stick to the scheme and not pull out? For me the lump sum would allow me to move away and so if date agreed etc id be putting house up for sale etc so would be keen for it to all go through.

Thanks
Jammin

Hi all

Quick query - the Univeristy i work for has offered this to all staff in a bid to make some savings :rolleyes:

Only info i have on this is as follows

-The Voluntary Severance package is a year’s salary incorporating notice and annual leave
- Deductions will not be made in respect of National Insurance, or pension contributions; within NI and pension rules;
-There will be a tax free element in accordance with revenue rules;
-Any Voluntary Severance agreed will be the subject of a compromise agreement (i.e. by mutual agreement), and will take effect before 31 July 2010;

Could someone put these into plain english for me? Is there a 30k limit for tax? hence the words "tax free element"

Im after some more information particularly with regards to my pension which is the LGPS (Local Government Pension Scheme) what would happen with this? Can i freeze it until i move onto another job? If new job is not with local government will i have to to transfer the LGPS elsewhere? or will i just have to claim early?

Im only 28 earning 30k a year and have worked in current job for 7 years, any more info on this scheme and Voluntary Severances in general would be great. Dont want to lose out with pension but the lump sum of annual salary is very tempting.

I assume if i apply for this my employers will need to provide more information regarding this scheme? or is it a pretty straightforward process?

thanks

getmore4less

If you are on a salary of £30k

Most/all of the redundancy will be tax free depending on how they have worked the notice(pilon) and holidays


40% tax comes in at over £43875 so plenty of room to earn more.

The payment will be taxed in the next tax year so do you have a job lined up that wil take the total over £43k?

jamminca69

getmore4less wrote: »

If you are on a salary of £30k

Most/all of the redundancy will be tax free depending on how they have worked the notice(pilon) and holidays


40% tax comes in at over £43875 so plenty of room to earn more.

The payment will be taxed in the next tax year so do you have a job lined up that wil take the total over £43k?

When they say "The Voluntary Severance package is a year’s salary incorporating notice and annual leave" does that mean in the package of a years salary it also includes notice and holidays? i.e. i cant expect any more from that? the lump sum is basically all i get?

Yes im on £32,000 at the moment so would be taxed on the £2000 as far as i can tell.

I do have a job lined up which in ideal world would start when i leave current job, and would be around the same pay (30k) but what exactly would i add that to? the £1200 over the 30k so next year for example would be £31,120? or what I was worried about and that i may have to add the whole severance lump sum to the next job's salary? meaning £32000 + £30000 = £62000 and the 40% tax.

aah

The issue seems to be whether a "compromise agreement" counts as redundancy for tax purposes. If it is, you will only pay tax on the £1200 you receive over and above the £30k, in whichever tax year you get it.

But if the compromise agreement does not count as redundancy then I suspect your worst fears may be realised.

I suspect it does count as redundancy, but I hope someone more knowledgeable than me will come along to help you.

Last year I was in same situation, and had to get employer to state that voluntary severance was actually redundancy, it seems that your employer (good old HE) has taken steps to avoid declaring redundancies through this VS arrangement.

Their reasoning on this is so that they can avoid their pension obligations to older workers who may choose VS and have their pension entitlements kick in automatically.

Oh and regarding your LGPS pension, as I understand it, you can defer it. Or transfer it into new job. If you are working in a similar establishment and are getting a similar salary then you might think about transferring it if you can get year for year. Make sure you get good advice before accepting a cash transfer value. Are you not in USS as your employer is a University?

jamminca69

aah wrote: »

The issue seems to be whether a "compromise agreement" counts as redundancy for tax purposes. If it is, you will only pay tax on the £1200 you receive over and above the £30k, in whichever tax year you get it.

But if the compromise agreement does not count as redundancy then I suspect your worst fears may be realised.

I suspect it does count as redundancy, but I hope someone more knowledgeable than me will come along to help you.

Last year I was in same situation, and had to get employer to state that voluntary severance was actually redundancy, it seems that your employer (good old HE) has taken steps to avoid declaring redundancies through this VS arrangement.

Their reasoning on this is so that they can avoid their pension obligations to older workers who may choose VS and have their pension entitlements kick in automatically.

Oh and regarding your LGPS pension, as I understand it, you can defer it. Or transfer it into new job. If you are working in a similar establishment and are getting a similar salary then you might think about transferring it if you can get year for year. Make sure you get good advice before accepting a cash transfer value. Are you not in USS as your employer is a University?

Thanks for advice so far aah and getmore4less

So is it definately worth trying to get a signed letter (or similar) with regards to the payment stating that it is redundancy?

Also when you say USS do you mean pension? as far as im aware mine is with LGPS.

My next step was to ring the CAB and get some advice from them, is there anyone else worth contacting prior to meeting for advice?

getmore4less

Holiday Pay should have tax and NI, think it is a legal requirement to have this as pay on termination.
A CA might be a legal way to avoid this.

PILON can be tax free depending on contract again the CA may get round this

I would ask for more details on how they are structuing the payments.
Is it 1 year gross to compnsate for loss of position

If they are saying they will be giving anything tax free insist on an indemnity should tax become liable they will pay it

This will test how sure they are that it should be tax free.

Asuming it does quailfy.
If you get £32k then £2k becomes the taxable contribution for the year it is paid.

Have a browse around the web for examples of what others have done I googled
"£30k tax free HMRC termination of employment"

The payment does not have to be just for redundancy allthought that is easiest with CA it can be tax free if done right.

jamminca69

getmore4less wrote: »

Holiday Pay should have tax and NI, think it is a legal requirement to have this as pay on termination.
A CA might be a legal way to avoid this.

PILON can be tax free depending on contract again the CA may get round this

I would ask for more details on how they are structuing the payments.
Is it 1 year gross to compnsate for loss of position

If they are saying they will be giving anything tax free insist on an indemnity should tax become liable they will pay it

This will test how sure they are that it should be tax free.

Asuming it does quailfy.
If you get £32k then £2k becomes the taxable contribution for the year it is paid.

Have a browse around the web for examples of what others have done I googled
"£30k tax free HMRC termination of employment"

The payment does not have to be just for redundancy allthought that is easiest with CA it can be tax free if done right.

Thanks for info

Meeting put back until tomorrow so just checking a few things, i assume will be able to have a copy of any compromise agreement so i can check it over before signing anything?

Ill also see about insisting on an indemnity should tax become liable they will pay it. I assume again this will need to be in writing.

jamminca69

jimmo wrote: »

The basic problem you seem to be worrying about is not likely to arise in your case.
As an example if you were on a salary of £30,000 and had a total redundancy compensation package of £60,000 then if you were made redundant in March your taxable income for the year would be the £30,000 salary already earned plus £30,000 of the redundancy package and higher rate tax would come into it.
On the other hand, if you were made redundant in April and didn’t have a job to go to your taxable pay for that following tax year would be salary £2,500 plus £30,000 of the redundancy package. You would clearly be in danger of going into higher rate liability with another job but many people don’t seem to be so lucky.
On the other hand there doesn’t seem to be much of a structure to your compromise agreement and it is just not on for your employer to blandly that it is all compensation.
See here http://www.hmrc.gov.uk/manuals/eimanual/EIM12856.htm

And here http://www.hmrc.gov.uk/manuals/eimanual/EIM13924.htm

However, if this comes to light it will be your employer who will be in trouble with HMRC for failing to correctly operate PAYE.
I wouldn’t be surprised if you employer asks you to sign an indemnity to compensate him if he is required to make good any tax lost.

Thanks for info

As im only earning 32k it would simply be a case of 2k being added on to whatever taz year the payment is made in? So in theory this shouldnt affect me unless i get a new job within 2k of the next tax bracket?

Thanks
J

getmore4less

jamminca69 wrote: »

Thanks for info

Meeting put back until tomorrow so just checking a few things, i assume will be able to have a copy of any compromise agreement so i can check it over before signing anything?

Ill also see about insisting on an indemnity should tax become liable they will pay it. I assume again this will need to be in writing.

If they want a CA they have to pay for YOUR independant legal advice.

jamminca69

jimmo wrote: »

Its taken me a couple of tries to work this out but I think you are saying that you earn £32k pa and therefore your redundancy package will be £32k.
So yes, if you get £32k in compensation £30k of that will be totally ignored for tax purposes and £2k will be added to your other income for the tax year of your redundancy when determining your tax liability for that year.
However, my real concern for you is that your redundancy package is not all compensation.
As an example, if you have a contractual right to 3 months notice or payment in lieu then £8k of your package is a payment you are legally entitled to and is taxable.
If you have an unused leave entitlement of a month then £2667 of your package is a payment you are legally entitled to and is taxable.
Now quite frankly, the concept of your university saying that that you can go for an overall sum of 1 year’s salary to cover all entitlements absolutely stinks of tax incompetence on behalf of the university.
Having dealt with a few universities as a taxman I am really not surprised at their apparent incompetence but you really have to consider all this in your particular circumstances.
Have you naively mis-interpreted the university’s offer?
Has the university naively mis-represented any tax consequences of the package it is offering you?
I think that the bottom line here is that your university is offering you £32k to go. At worst I envisage a tax liability of (8k +2667) 10667@ 20% = £2133.40 leaving you £29,866 in pocket.
To me that is a no-brainer. Take the money and run, but you are you.

Excellent info thankyou - have answered some of my concerns and put together answers to some of the questions i have.

The PILON thing worried me and the fact they have this all in one payment would mean i could be taxed and i understand how it will work now.

As for misunderstanding the university offer, the quote i put in first post is literally the only info i have on the package that came in the original email.

-The Voluntary Severance package is a year’s salary incorporating notice and annual leave
- Deductions will not be made in respect of National Insurance, or pension contributions; within NI and pension rules;
-There will be a tax free element in accordance with revenue rules;
-Any Voluntary Severance agreed will be the subject of a compromise agreement (i.e. by mutual agreement), and will take effect before 31 July 2010;

From your post and that info i would say they are incorporating everything into the 1 payment and therefore i will be liable to be taxed on the notice period and holiday pay part of the payment?

I will need to confirm the holiday days i have left and also what my entitled notice period is.

Also as seen they do mention a compromise agreement, so if they do require this they will have to pay for independant legal advice for me?

jamminca69

jimmo wrote: »

Absolutely no idea I'm afraid, I'm a retired taxman, not a lawyer.

Sorry that question was more aimed at getmore4less after his post about the CA.

Had meeting, a date has been set and 1 month prior i will be given a compormise agreement that i will need to get union to check over. I will then sign if all ok.

All holidays will be taken beforehand so wont be taxed on anything remaining, and i asked about being charged tax on any contracutal notice but they said the compromise agreement will state the payment is made in regards to redundancy and so first 30k tax free and only remaining amount will be taxed and also added to next tax years income.