Supertax on April redundancy pay

ExNHSMan

Just been listening to MoneyBox (Sunday night repeat of radio show earlier this week) - having been tipped off by a friend who knows I am exactly the situation described.
The gist is this: if you get made redundant and paid in April, HMRC will assume that this payment is one month's pay for 2011/12 and apply tax as if it is grossed up for 12 months - example pay out is £50,000 first £30,000 tax free, so assumed taxble earnings 12x£20,000 = £240,000 which instantly takes you into 50% tax band. So 50% tax taken on the £20,000 and any further earnings during the year until after the 20011/12 year finishes when HMRC will readjust when the reality is that your pay is somewhat short of even the 40% threshold - and you get a rebate.
So for a whole year (in this example) you could be deprived of around £6,600 straight off and an extra 30% (difference between 20% tax rate and 50% tax rate) on all further earnings, causing some serious cashflow problems if you weren't prepared.
My employer (as a genuine offer) has given me the option of either taking my 31st March redundancy money in the March or April salary run, to which I was about to respond that April was better as adding to 2010/11 tax year would nearly all fall into higher (40%) rate but applying to 2011/12 would be mostly or wholly 20%.
Dilemma now whether to go for 2010/11 and defintley be taxed more or 2011/12 and pay tax now to get back in 12+ months' time.
Can anyone advise? Podcast available at www.
bbc.co.uk/podcasts/series/moneybox
Its the last item in 19th Feb programme.

dori2o

ExNHSMan wrote: »

Just been listening to MoneyBox (Sunday night repeat of radio show earlier this week) - having been tipped off by a friend who knows I am exactly the situation described.
The gist is this: if you get made redundant and paid in April, HMRC will assume that this payment is one month's pay for 2011/12 and apply tax as if it is grossed up for 12 months - example pay out is £50,000 first £30,000 tax free, so assumed taxble earnings 12x£20,000 = £240,000 which instantly takes you into 50% tax band. So 50% tax taken on the £20,000 and any further earnings during the year until after the 20011/12 year finishes when HMRC will readjust when the reality is that your pay is somewhat short of even the 40% threshold - and you get a rebate.
So for a whole year (in this example) you could be deprived of around £6,600 straight off and an extra 30% (difference between 20% tax rate and 50% tax rate) on all further earnings, causing some serious cashflow problems if you weren't prepared.
My employer (as a genuine offer) has given me the option of either taking my 31st March redundancy money in the March or April salary run, to which I was about to respond that April was better as adding to 2010/11 tax year would nearly all fall into higher (40%) rate but applying to 2011/12 would be mostly or wholly 20%.
Dilemma now whether to go for 2010/11 and defintley be taxed more or 2011/12 and pay tax now to get back in 12+ months' time.
Can anyone advise? Podcast available at www.
bbc.co.uk/podcasts/series/moneybox
Its the last item in 19th Feb programme.

Will you be going back into work/receiving a pension following your redundancy? If so you can get the tax refunded by handing in your P45 to your new employer/pension provider. You will not have to wait 12 months, it will be refunded as and when due via your salary/pension payment.

If you do not expect t go back into employment, and will not be claiming any taxable social security benefit, until after 05/04/2012 then you can claim the tax back straight away by either writing to HMRC with your P45, or completing the form P50 and submitting this with your P45.

MikeyBhoy

Be careful.

If the taxman believes that you have come to an arrangement with your employer to avoid paying tax by delaying the payment into the new tax year they can pursue the matter by saying that the tax is liable for the date in which it was 'earned', not when it was paid, i.e. 31 March.

I was made redundant in late March 2010, but paid in late April 2010 and sought clarification from a HMRC tax technician (called them anonymously). I asked specifically about the 'earned' v 'paid' criteria. As it was our company policy that redundancy payments are paid in the pay run following redundancy, he told me this was fine - any taxation would fall in the new tax year.

He said that that they include the caveat of 'when it was earned' because it allows them to pursue employees/employers who they suspect of colluding together to avoid paying higher rates of tax. I have some paperwork somewhere that references the relevant section of the HMRC manual - will look it out when I get out of bed

Also, regardless of which tax year you receive the payment, I suspect your employer will probably only take 20% tax off the total above 30k. At a later date HMRC will come looking for the rest. That's what happened with everyone at our company.

getmore4less

Take the money in the new tax year delay any new job or JSA claim for a month fill in a P50.

Simple process refund in return of post with a new P45 for the new job or JC+

Mostly scaremongering by the press on this one.

There is an issue if you get a pension or want to start a new job immediately but then the cashflow issue is leess importants since there is the £30k in the pot before the tax kicks in.

Amanda65

Just seen this post. OH was advised yesterday that he will be made redundant on 10th April. He will receive March salary as usual and then presumably when he leaves will get 2 weeks money, any holiday pay owed and statutory redundancy (about £2400) -does this legislation mean he will pay tax on his redundancy money in April or does this only apply if the money you receive is over the tax free amount? Sorry if I'm being a bit dim but head not thinking straight atm