Payment in lieu of notice - wrongly taxed?

Charlie_Manchester

I have just been made redundant and received a tax free sum plus 3 months payment in lieu of notice.

So I thought that I was geting my usual pay less the usual tax - wrong. The outsourced payroll provider looked at this one of taxable sum of £16k but assumed that £16k was my new monthly wage (I wish) and multiplied it by twelve to work out the 'new' annual income and taxed me accordingly. I paid 50% on some of it!

My ex employer says that this is correct and the correct tax was paid. I was expecting 3,300 but instead paud £6,300. A lot when you are now unemployed. I can get it back after 5th April 2011 though!!

Advocatus

The taxation of termination payments can be a complicated issue, but there is a general (and usaully applicable) rule of thumb.

Payments on termination can be broadly divided into two sorts:

1. Contactual payment
2. Non contractual (eg. severance payment).

Contractual payments such as your notice pay are taxable as per normal. In some cases notice pay (the sum equivalent to) is non taxable if it is paid as damages as opposed to notice - slightly more complicated and probably not relevant in your case.

Non contractual payments such as your severance payment are NOT taxed up to a limit of £30,000 for that tax year.

If you have a non-contractual payment under 30,000 that is being taxed, then prima facie you would appear to have been taxed wrongly. You need to let your employer know or put in a formal grievance.

Charlie_Manchester

Thanksfor your reply.

I agree that the three months in lieu of notice should be taxable. I assumed that I would get my usual net monthly salary multiplied by 3.

Instead I got far less due to the tax being almost double that I usually pay. I used to receive a gross of £5,333 which equals £64,000 per annum. I was expecting a £16,000 lump sum but taxed at my usual rate. Instead I paid double the usual tax.


The outsourced payroll provider saw this one lump sum ad my new monthly salary of £16,000 per month, equating to £192,000 per annum so theey taxed this sum as if I were on £192,000 per annum so I hit the higher 50% bracket. I have no income whatsoever right now.

HMRC say that in theory as it is an automated system that the calculation is corrent as an assumption would be made that I had a fantastic increase. My employer says that there is nothing the can do.

getmore4less

You can get it back sooner.

Look up the tax form P50, it sorts it out in a month or two,

Problem is you have to meet some criteria like delay claiming JSA and say you won't get another job for a while.

If you do get another job it will sort itself out through PAYE as long as the P45 was correct.

betty_ford

Exactly the same has happened to me - I phoned the tax office today and basically my options are:

1. Wait until I get a new job and it will get sorted out through PAYE.

2. Wait until I sign on and it will get sorted out through PAYE.

3. Wait until the end of the tax year and apply for a refund in a lump sum.

4. Submit a form P50 and I will get refunded "in dribs and drabs" by cheque monthly with a new P45 being issued each month by the tax office.

I was made redundant whilst on maternity leave so I'm not going to apply for new jobs immediately as I am still at home looking after my daughter. I'm really really hacked off that the IR will have about £3k of my money which I would like to be earning interest on and will only pay it back to me now in such a half-arsed and inefficient way.

Debt_Free_Chick

Charlie_Manchester wrote: »

So I thought that I was geting my usual pay less the usual tax - wrong. The outsourced payroll provider looked at this one of taxable sum of £16k but assumed that £16k was my new monthly wage (I wish) and multiplied it by twelve to work out the 'new' annual income and taxed me accordingly. I paid 50% on some of it

It's not the fault of the payroll provider - HMRC's tax tables work this way. Imagine if you had got a job providing this pay (yeah, I wish too!!), then you would have underpaid tax for the whole year if your old salary was used to calculate tax.

It will all wash out over the rest of the tax year. If you get another job, then the tax you pay until next March will be less, to take account of the tax you've already paid. If you don't (heaven forbid!) then you'll be able to claim back any tax overpaid.

The payroll provider is right though. They had no option here as this is the way that HMRC's tax tables work.