Tax on Redundancy Payment

matt4666

Found out a little gem from our friends at HRMC

If you take redundancy you're first £30k is tax free. However anything about that is subject Income and NI. No suprises there really.

But here is the new sting in the tail. Last year everything over 30K was taxed at flat rate 20%, plus NI contributions, this year things are a little more confusing.

The Taxman is now taxing it as Month 1 earnings, so if you have a redundancy of 60K you will have £30K taxed as months earnings and a whopping £14K is taken as Tax. And it is up to you to claim back the £8k as a tax refund.

Still haven't figured out if they will be liable to Interest against the tax return (probably not knowning that lot).

suso

matt4666 wrote: »

Found out a little gem from our friends at HRMC

If you take redundancy you're first £30k is tax free. However anything about that is subject Income and NI. No suprises there really.

But here is the new sting in the tail. Last year everything over 30K was taxed at flat rate 20%, plus NI contributions, this year things are a little more confusing.

The Taxman is now taxing it as Month 1 earnings, so if you have a redundancy of 60K you will have £30K taxed as months earnings and a whopping £14K is taken as Tax. And it is up to you to claim back the £8k as a tax refund.

Still haven't figured out if they will be liable to Interest against the tax return (probably not knowning that lot).

source please.

AirlieBird

matt4666 wrote: »

If you take redundancy you're first £30k is tax free. However anything about that is subject Income and NI. No suprises there really.

A big surprise as redundancy payments are exempt from National Insurance.

chrismac1

Not sure of the source but it is true. I have some clients and friends who are being made redundant from the nuclear industry. Last year the cash would have been non-taxable. this tax year it is as the OP says, tax first and ask questions later. I believe the reason for this change is to increase the case backlog and hence preserve as many jobs in HMRC as possible.

taxsaver

chrismac1 wrote: »

I believe the reason for this change is to increase the case backlog and hence preserve as many jobs in HMRC as possible.

Oh you cynic.... or should I say realist?

dori2o

Where tax is due (because the payment is taxable in
full or the payment is a ‘taxable on amounts over
£30,000’ payment above this limit), and:
• you make the payment to the employee when
or before the employee leaves:
– include the taxable amount in gross pay on
form P11 and operate PAYE in the normal way
– include the taxable amount in gross pay on
form P45
– complete a form P45 and send P45 part 1 to
HMRC online
• you make the payment to the employee after
the employee leaves:
– include the taxable amount in gross pay on
form P11 for the tax week or month number
in which you make payment
– operate PAYE by using Code 0T (on a week
1/month 1 basis)

Taken from page 103 of the 2011/2012 version of the employers guide to PAYE and NIC's CWG2

The reason for this is clear. Those who receive large salaries and or redundancies and then go straight into further employment can end up with large underpayments due to no tax being collected from the redundancy payment at the higher rate when the tax from the excess redundancy is collected at BR. This way it will limit the affect of the above scenario especially now we have the 50% tax band and the higher tax on those who earn more that £115k due to the reduction in the personal allowance.

At the end of the day those who get redundancies in excess of the £30k tax free are usually those in the higher tax bracket anyway.

chrismac1

So, anyone got any suggestions as to why this stuff has been OK tax-free for the past 30 years and now suddenly is not? Can I take a punt that it's only recently become apparent just what a mess HMRC has made of things, so they'd sooner have an overpayment of tax and the victims spending hours on the helplines and writing letters to join the mail queue, than sort it out on end of year tax returns which HMRC will most probably muck up in any case?

dori2o

chrismac1 wrote: »

So, anyone got any suggestions as to why this stuff has been OK tax-free for the past 30 years and now suddenly is not? Can I take a punt that it's only recently become apparent just what a mess HMRC has made of things, so they'd sooner have an overpayment of tax and the victims spending hours on the helplines and writing letters to join the mail queue, than sort it out on end of year tax returns which HMRC will most probably muck up in any case?

How exactly has it been tax free in the past?

The first 30k is still tax free now as it always has been. It's just that the excess , i.e. that over 30k will now be taxed using 0T wk1 rather than BR, in cases where the redundancy payment, or in fact any other payment is made after the P45 has been issued.

As I said the majority of those receiving a redundancy payment in excess of £30k are likely to be higher rate taxpayers anyway, therefore this could save them from having a huge underpayment at the end of the tax year as was the case in previous years when the excess redundancy payment was taxed at BR.

John_Pierpoint

matt4666 wrote: »

Found out a little gem from our friends at HRMC

If you take redundancy you're first £30k is tax free. However anything about that is subject Income and NI. No surprises there really.

But here is the new sting in the tail. Last year everything over 30K was taxed at flat rate 20%, plus NI contributions, this year things are a little more confusing.

The Taxman is now taxing it as Month 1 earnings, so if you have a redundancy of 60K you will have £30K taxed as months earnings and a whopping £14K is taken as Tax. And it is up to you to claim back the £8k as a tax refund.

Still haven't figured out if they will be liable to Interest against the tax return (probably not knowing that lot).

I think I understand the tax man's point of view, given the complex rules been forced onto the system by rapacious government spending. (Massive deficit, increasing number of dole / benefit claimants and now 3 wars on the go at the same time!).

Does anyone have a year by year list of the number of higher rate tax payers, plus a projection of the number for 2011/12?
Can we expect a 30% increase in 15 month's time of people complaining about tax demands for their second job/JSA/early retirement pension?

taxing

The first 30k is still tax free now as it always has been. It's just that the excess , i.e. that over 30k will now be taxed using 0T wk1 rather than BR, in cases where the redundancy payment, or in fact any other payment is made after the P45 has been issued.

Was aware of the OT, thanks.

But just to be clear, the £30,000 tax exemption is only due if the payment at the early cessation of the employment is not otherwise taxable within the law.

That is if there is any 'contractural' right, or ay implied right to the payment - it is the employer's habit, say, to pay sums above statutory redundancy entitlement. Statutory redundancy is always tax free - but contributes towards the £30,000 limit.

In practice, it is fairly common for the employer to tax the full payment and leave it to the (ex) employee to argue the toss with HMRC for the £30,000 exemption - this is because if the employer gets it wrong and doesn't deduct tax when he should have done, then HMRC will pursue the employer for the tax if they disagree with that PAYE tax treatment made at the time of payment.

The BR code was a cash flow advantage and the liability was caught through self assessment - yes, as usually persons receiving 'goodly amounts' tend to be higher earners who are already in the system.

Regards.

Andyboy

i find myself in this position but to correct an earlier entry am NOT a higher rate taxpayer. At least i wasn't until i was made redundant.

I think it would be useful to others to say how you go about claiming back the overpayment. anyone wish to have a punt at this?