Severance pay and tax

royh

I'm wondering if anyone can help.

I recently took a severance package of gross £80K - £30K of which was tax free (my annual salary was £80K). My finish date was 31st March 2011 and I received my severance pay (after my P45) in mid April. I have been surprised to learn that I paid £23K in tax - I would have thought I should only have paid about £19K. Payroll inform me that if I don't work again this year that I will be due a tax rebate - can someone explain why my calculation is/was wrong about how much tax i paid.

CLAPTON

what is your tax code for this year; is it correct (it may have BIK from last year)

dampsquib

The old system was that payments received after the P45 had been issued would simply be taxed at the basic rate (after deduction of the £30,000). Subsequently, if you owed some tax at higher rates, this would be collected later from you by HMRC. I believe I read on this forum though, that the PAYE instructions issued to employers have been changed from this April(?) and now employers deal with the payment as if it was normal salary - consequently as you received a large amount in month 1, you will have paid quite a bit at 40 and 50 percent. You should be eligible to get some of this back later. I'm not sure whether you can claim it during the year, or whether you have to wait for year end.

chrisbur

If I understand your post correctly this payment was made after the P45 was issued, if that is correct then your employer would apply the code 0T month 1 to the payment which would give a tax deduction of over £23000 on the £50000 that was taxable, this would include a bit at 20% a bit more at 40% and a big chunk at 50%. This tax is advised to the tax office at the end of the year, so if it was made after April 5 it will not be seen by them untill after April 5 in 2012 when it will be combined with your other earnings for 11/12 and if there has been an overpayment it will be rebated to you. I personally would write to them after the tax year end if it looks like you will be due a rebate.

If the payment was made before April 5 then all this will happen a year earlier so might be worth checking with your employer if it is not clear on their advice of payment to you.

jimmo

As you haven't given us your figures we can't see where you may have gone wrong.
Assuming that the tax code used was OT on a month 1 basis under the new rules for payments made after leaving employment I make the tax due £23,166.90
With a taxable payment of £50k in Month 1 you are taxed on the basis of an annual salary of £600k.
basis rate tax (35k/12) 2916 @20% = £583.20
40% rate [(150k -35k) / 12] 9583@ 40% = £3,833.20
50% rate on balance 37501 @ 50% = £18,750.50
Total £23,166.90.
For a detailed explanation of the principles see post #9 on this thread.
https://forums.moneysavingexpert.com/discussion/3182178

Cook_County

Of course there might be foreign service relief, but we'd need more detail from the OP.

royh

Thanks to all - yes my tax code this month was OT and payment was after April 5th.

I now have another related question - if I do earn anything else this year that takes me over £100K (including my severance pay) will I start to lose my personal tax allowance (in other words - does my severance pay count towards the amount at which I would start to lose my tax allowance, and does a pension count towards that also)

Any help gratefully received.

taxsaver

Unfortunately yes, all income (other than the £30k tax free redundancy exemption) will count.

Might be worth having a leisurely summer!

royh

Even my pension lump sum - i assume that to be tax free also. So just so i can be clear - the tax free element of severance would not count to wards my income for tax allowance purposes. ie. only the amount over £30K. and if my pension is £15K a year I should be able to earn another £35K(the £50Kover the £30Kplus my £15Kpension = £65K - leaving me with £35K left)

Otherwise a leisurely summer will be happening!

royh

jimmo wrote: »

As you haven't given us your figures we can't see where you may have gone wrong.
Assuming that the tax code used was OT on a month 1 basis under the new rules for payments made after leaving employment I make the tax due £23,166.90
With a taxable payment of £50k in Month 1 you are taxed on the basis of an annual salary of £600k.
basis rate tax (35k/12) 2916 @20% = £583.20
40% rate [(150k -35k) / 12] 9583@ 40% = £3,833.20
50% rate on balance 37501 @ 50% = £18,750.50
Total £23,166.90.

jimmo thanks for this - am I right in thinking that if I didn't work again this year (making my annual income £50K) I should only have paid about £13K in tax based on £35K @ 20% = £7K, and £15K @ 40% = £6K.

If I receive a pension of £15K this year (making my annual income £65K) should my tax bill be as follows £35K @ 20% = £7K, and £30K @ 40% = £12K.

Either way it appears to me I should be due a sizeable rebate from the £23K already paid. Is it best to claim for this now or next year?

Any further info gratefully appreciated

jimmo

I noticed that you have asked this question before but hoped that someone with more up to date knowledge than me would have answered you.
I think there are 2 aspects you may need to look at.
1) What is your potential tax liability for 2011/12?
2) How will the operation of PAYE during 2011/12 affect you?
The first one is relatively easy. Lump sum superannuation payments are not assessable.
http://www.hmrc.gov.uk/manuals/eimanual/EIM13660.htm
Your £50k (out of the £80k) redundancy money is assessable income.
Your pension of £15k is assessable income.
You have an Income Tax personal Allowance of £7,475.
So far, you have net taxable income of (50k +15k - 7475) £57,525.
I suggest you should now consider what you are going to do with your superannuation lump sum and your net redundancy money. You are not going to get a great deal of that into an ISA so it is likely to generate assessable interest.
Not a lot of difference to your figures but may be worth taking into account when considering any potential earnings.
Moving on now to how PAYE works I can only say what used to happen under the old rules with any degree of certainty but my assumption is that your taxable redundancy money, having been subject to code 0T month 1, is in effect, a payment outside of normal PAYE. The tax you have suffered is in a sort of limbo and HMRC will not even be notified of the amount until your former employer's annual return in April or May 2012.
I fear that your chances of getting anything back before then is pretty remote.
On the other hand, if you do get another job, that £50k taxable redundancy payment will also be in limbo and your PAYE deductions should be on the basis of your £15k pension and your future earnings only.
Then, some time after next April, it should all be sorted out by HMRC.
If you don't take another job you will almost certainly be owed a repayment.
If you take another job you could find your self still being owed a repayment or you could find yourself owing HMRC quite a bit of money.
I do hope that makes sense, it does to me. However my knowledge of HMRC gobbledegook is becoming a bit dated.