Help! Payment in lieu of notice and Tax!

Maggie27

Hello, a very very easy question for people who know what they are talking about, but i don't, so any help greatly appreciated!

I have just been made redundant. I received payment in lieu of notice, which was six months (!) and effectively took my annual income from that employer up to around £41k (ie basic rate tax payer)... ie 20,500 in their employment, 20,500 as payment in lieu of notice.

However, the way they calculated was all through one payroll month in October, so i effectively got paid £20,500 gross in one month. This was taxed pre-dominantly at 40% by my old employer. (they multiplied by 12 as if to get an annual salary, adjusted for tax allowance, and then applied the tax rates to get my tax charge, dividing by 12 once again to get my monthly charge.)

I have just been offered a new job, starting next week. My question is, will that be automatically taxed at 40%, as i have already triggered the 40% threshold (and i will need to reclaim over-paid tax in April), or is the system clever enough to realise that i still haven't used up all my 20% allowance yet, using P45 information?

Sorry if a simple question, i really don't know how this works!!!!

Thanks so much
mags

magpiecottage

Six months pay in lieu of notice is unusual. Are you sure it was a contractual payment? If not it may be tax free - or at least that element of it that was not contractual may be.

You may find that you have a combination of tax free redundancy pay and a payment in lieu of notice with is taxable.

The tables used to calculate PAYE include a "free" allowance for the year to date (i.e. from April), which is allocated as 1/12 of the annual total each month. It does the same for higher rate tax.

A big taxable payment in October will have been combined with your April to September payments and compared to 7/12 of the annual thresholds. In November the earnings for the month will be combined with your April to October earnings and compared to 8/12 of the annual thresholds and so on until March.

This may well mean you find you are getting rebates in your pay until March.

Good luck in the new job.

If so, the taxable element will be taken by the tables that are used to calculate PAYE as indicating higher overall annual earnings than will be the case. If so you will find you are getting rebates in your pay between now and April.

Maggie27

Thanks for the info MagpieCottage, really very much appreciated.

Yes six months is a long time, but it was contractual, as it was my notice period. I've checked it out already, and it is certainly taxable. :-(. I only received a small redundancy payment, and yes this was tax free.

Once again thanks very much for the detailed response, and lets hope the new job goes well!
m

anamenottaken

Maggie27 wrote: »

Thanks for the info MagpieCottage, really very much appreciated.

Yes six months is a long time, but it was contractual, as it was my notice period. I've checked it out already, and it is certainly taxable. :-(. I only received a small redundancy payment, and yes this was tax free.

Once again thanks very much for the detailed response, and lets hope the new job goes well!
m

Though your notice was contractual, payment in lieu of that notice may not have been contractual. But you say you have checked it out........

fred7777

Something similar happened to me last year. The company moved site & I got paid 3 months salary paid after I left because I stayed until they had moved.
This was taxed very heavily, so was my next payslip at my new employer, from then on tax was less much less as it became apparent to HMRC that I wasn't going to be paid such high sums each month.
When I checked the end of year figures over the whole year I was taxed exactly what I should have been even though the amount taken each month had varied.

Ferguson9

This is interesting. I was paid three months salary in lieu of notice but was given the payment tax free.

My termination agreement stated this was an 'ex-gratia' payment but I had to also agree a disclaimer that if HMRC queried it I would be liable for the tax due.

I'm coming round to fill in my tax return for that tax year and am unsure about whether to declare it?

fred7777

According to HMRC payment in lieu of notice is taxable, sorry.

http://www.hmrc.gov.uk/manuals/eimanual/eim12975.htm

getmore4less

fred7777 wrote: »

Something similar happened to me last year. The company moved site & I got paid 3 months salary paid after I left because I stayed until they had moved.
This was taxed very heavily, so was my next payslip at my new employer, from then on tax was less much less as it became apparent to HMRC that I wasn't going to be paid such high sums each month.
When I checked the end of year figures over the whole year I was taxed exactly what I should have been even though the amount taken each month had varied.

It is most likely possible that you could have got that added to the tax free pot if the redundancy pot was not allready over the £30k limit, it was over £30k then not a lot you can do.

anamenottaken

fred7777 wrote: »

According to HMRC payment in lieu of notice is taxable, sorry.

http://www.hmrc.gov.uk/manuals/eimanual/eim12975.htm

Did you actually read all the site for which you have provided a link?

It is not clear-cut. PILON is not always taxable.

OurKev

I was in a similar position just over 2 years ago.

I did receive the payment tax free (a very welcome boost!), after signing a "compromise agreement". A compromise agreement effectively signs away some of your rights to take legal action against your employer in return for a cash payment. The employer is obliged to pay a reasonable charge for an employment lawyer to review the agreement and advise you.

The reasoning seemed to be - If your contract specifies 6 months notice and your employer does not want you to work for that period, the payment can be considered as compensation for the employer not honouring your contract. The compromise agreement helps formalise matters and ensure the tax free status of the first £30000.

It may be too late, but a quick google should come up with details of employment lawyers who'll give you some free initial consultation.

Good luck

alan888

Payment in Lieu of holiday pay

Can anyone help in respect of payment in lieu of holiday pay
I was employed by the Insolvency Service at at date of retirement I was owed 30 days annual leave
They have calculated my payment in lieu by dividing my annual salary by 365 days to get a daily rate and then multiplied by my annaul leave of 30 days
This means thay are aplying amuch lower rate than I think they should as I dont work for 365 vdays per year!

Can anyone help. They just keep stonewalling me!