Effect of Redundancy Pay on Marginal Tax rate

lennyb_2

Help please from any UK tax experts.

I've a question about Income tax treatment as a result of a potential redundancy payoff. Any expert able to advise please. I'm in a muddle.

OK. I find it hard to explain, but basically, is a sizable redundancy payoff which is (mostly) not in itself taxable going to bump up my tax bracket to 40%, thus causing me to pay more tax on other income. I'll try to illustrate with some numbers.

I know that there are all sorts of caveats about what constitutes tax exempt payments, but for the interest of clarity, consider this a bona fide payoff of £31,000 where the first £30,000 is not subject to income tax.

Let's say I'm a basic rate tax payer who will earn £35,000 by the end of February, at which time I take an qualifying early leaver payment of £31,000 (arbitrary numbers) of which £30k is tax free and £1k taxed at my 'marginal rate'. Then maybe I find other employment.

Now, I understand that my personal allowance, the first £6,475 of my income is not counted at all (might have changed recently) . So, my 35,000-6,475 = £28,525 salary is simply taxed at 20%. I have no problems with that so far. Marginal rate currently 20%

But... What I can't grasp is this...

When the £31,000 payoff is added to my salary, it will push what I think of as my income, to £66,000. Which is in the territory of 40% tax rate. I can't help feeling that somewhere along the line some part of my 'income' is going to be taxed at 40%. What if I get another job? Do I start that job as a 40% tax pyer by virtue of my vast £66k income to date?
Or does the exempt £30k get added to my personal allowance, thus making my first £36,745 non-taxeable and the next £28450 taxed at 20%?

I hope I explained myself ok. Please be gentle with me and don't complicate the answer with subtlties like splitting payment over tax years, or with arguments about what qualifies as a non-taxeable payoff.

Thanks in advance,
L.

Liquorice_Twirls

I'm no tax expert for sure, but what has happened to my hubbie is that the redundancy over 30k was taxed at 20% and a letter was sent from his employer saying that there could be further tax due at a higher rate but it was up to him to pay this over. The tax man were also informed by the employer.

I think what will happen after 6th April 2011 is that he will get a self assessment form which will allow him to declare all his income for the year and get the tax due for the year calculated. Although he has not yet started his new job I suspect that his current tax code will continue to 5th April.

I'm not sure if that answers your question and if anyone would like to add/change what I have assumed I would too be helped by reading it.

Edited: Rereading your post - I think your tax for year would be on £28,525 as you have calculated and I don't think you will move into the 40% bracket as the £30k is tax free.

getmore4less

Ignore the first £30k (if it is eligible) add the rest to the income for the year and tax normaly.

Note that any PILON may be taxable and liable for NI.

New job just adds to the existing total so far(ignoring he first £30k of redundancy).

40% kicks in when the personal allowance and the 20% band is reached.

Don't forget there may also be pension and other income to consider that can adjust the totals.