medical retirement, PILON & tax on ESA

Quiet_Life

I need some advice for a friend
He has been off work sick for just over a year.

He received a form from his employer (some months ago) stating that his statutory sick pay had finished,
and that he would receive ‘sick pay at pension able rate’
and that he should phone and claim ESA.

He phoned and claimed ESA and advised them about the ‘sick pay at pension able rate’
that he would be receiving from his employer.

He received contributory ESA at the low rate and after 13 weeks was placed in a support group.

His employer has now offered him retirement on medical grounds.

Now for the advice:

1) Someone has told him that he should have informed the tax man that he was receiving contributory ESA as it is taxable.
Is this correct?

2) Should his contributory ESA have been reduced because he was receiving ‘sick pay at pension able rate’?

His ‘sick pay at pension able rate’ is approx £900 per month gross.

He does not claim any other benefits.

He has been offered 12 weeks statutory notice from work (paid in 3 monthly instalments)

OR

PILON (Payment in lieu of notice), tax free now.


Management are quite adamant that PILON is tax free and his union is quite adamant that it is not.
3) Is the PILON tax free or not?


Many Thanks for any advice.

Quiet_Life

Help.......
Can anyone???????????
Please:o

Googlewhacker

this is a slower board, you will need to wait at least a day for someone who can answer correctly.

ceridwen

Well instead of having a difference of opinion between the employer and the Union as to whether money is taxable - why doesnt he go direct to the horses mouth? - ie ask HM Revenue and Customs....mind you they might take a while to answer.......;) (perhaps he might get round the likely delay in them answering the phone/letter by looking on the Internet to see if he can find any webpages by them which contain the answer to that).

When you say he has been offered "ill health retirement". IS it really ill health retirement OR is it incapacity dismissal? He needs to know which of the two it is.

Ill health retirement means he would get his work pension immediately. Incapacity dismissal would mean being handed a lump sum payoff and that would be the end of his contact with them.

I have to say that I expect its really incapacity dismissal.

Quiet_Life

Thanks for the replies.
It is ill health retirement.
He has been given an estimate of the pension lump sum and the yearly amount of pension

zzzLazyDaisy

Re PILON - He needs to look at his contract of employment and any supplementary information, such as an employment handbook.

If there is a PILON clause in his contract ( saying something like 'we reserve the right to pay you and terminate your employment early, instead of allowing you to remain in employment for the period of your notice') or if there is any clause that effectively makes it a contractual entitlement to receive a payment in lieu, then the lump sum is taxable.

If not, then the payment may be made free of tax and NI, because it is technically compensation for breach of contract.

You'll find more info here http://www.hmrc.gov.uk/bulletins/tb24.htm

Quiet_Life

Many Thanks daisy, I'll pass the info on

getmore4less

zzzLazyDaisy wrote: »

Re PILON - He needs to look at his contract of employment and any supplementary information, such as an employment handbook.

If there is a PILON clause in his contract ( saying something like 'we reserve the right to pay you and terminate your employment early, instead of allowing you to remain in employment for the period of your notice') or if there is any clause that effectively makes it a contractual entitlement to receive a payment in lieu, then the lump sum is taxable.

If not, then the payment may be made free of tax and NI, because it is technically compensation for breach of contract.

You'll find more info here http://www.hmrc.gov.uk/bulletins/tb24.htm

HMRC do sometimes cnsider it taxable even if it is not in the contract especialy if it has been comon practice to pay PILON.

Get the employer to indemnify the tax situatoin by offering to pay it if HMRC do decide it is taxable.

THis usualy sort out the employers possition since they look ito it properly.

50Twuncle

Quiet_Life wrote: »

I need some advice for a friend
He has been off work sick for just over a year.

He received a form from his employer (some months ago) stating that his statutory sick pay had finished,
and that he would receive ‘sick pay at pension able rate’
and that he should phone and claim ESA.

He phoned and claimed ESA and advised them about the ‘sick pay at pension able rate’
that he would be receiving from his employer.

He received contributory ESA at the low rate and after 13 weeks was placed in a support group.

His employer has now offered him retirement on medical grounds.

Now for the advice:

1) Someone has told him that he should have informed the tax man that he was receiving contributory ESA as it is taxable.
Is this correct?

2) Should his contributory ESA have been reduced because he was receiving ‘sick pay at pension able rate’?

His ‘sick pay at pension able rate’ is approx £900 per month gross.

He does not claim any other benefits.

He has been offered 12 weeks statutory notice from work (paid in 3 monthly instalments)

OR

PILON (Payment in lieu of notice), tax free now.


Management are quite adamant that PILON is tax free and his union is quite adamant that it is not.
3) Is the PILON tax free or not?


Many Thanks for any advice.

PILON is not tax free - it is taxed as income (which is what it is)

ESA will be paid at the lower rate (in addition to any income from whatever source) for 13 weeks after which time - the ESA rate rises to the higher rate - any income above £93 per week will be taken off ESA at a rate of 50% - so if he earns £200 per week pension - £53 will be taken off his ESA (£200 minus £93 divided by 2)
And yes - HMRC should be informed of any change in income - employers often fail to notify

zzzLazyDaisy

21Twinkle wrote: »

PILON is not tax free - it is taxed as income (which is what it is)

This is not correct. PILON is only classed as income if the payment is a contractual right.

Please read the link to the HMRC advice leaflet that I posted above.

SarEl

zzzLazyDaisy wrote: »

This is not correct. PILON is only classed as income if the payment is a contractual right.

Please read the link to the HMRC advice leaflet that I posted above.

However this does not mean that PILON will be paid at gross salary (a common misconception). It is tax free in the sense that it is not counted as income for the calculation of taxable earnings. Many employers pay PILON at the net rate though - not gross - so this would need to be checked.