Getting tax back on redundancy extra payment

outgoingzero

Hi there

Hope I'm posting in the right board.

I've been made redundant, and the Company have told me I'll be getting an extra 3 months payment, which I understand to be for me handing over IT systems to people properly, not setting the servers and systems on fire when I leave etc.

I understand money promised in your contract if taxable but I am not contractually entitled to this payment.

For some reason they are saying this is payment if lieu of notice and therefore taxable. This is despite my contract says they have to give me 3 months notice, and they've told me I've had to work this (which I have). The 3 months payment is additional to this but they call it notice pay for some reason.

I don't see why this extra payment should be PILON and taxable, and though I've pointed this out to them they've pretty much told me that's just the way it is.

My stat. redundancy payment is extra to this and of course not taxable (3K or so).

Am I right that this need not be taxable?
Given it will be taxed under PAYE before I get it, do I stand any chance of getting it back from the tax man if I show them my contract of employment and my redundancy letter?

ceeforcat

This is a complicated area but, in summary, if the PILON is to be regarded as compensation for early termination of your contract, it is not taxable. However, you have been given due notice of the termination but will be paid your full wage until the date of leaving - there is no compensation element.

In addition, for it to be non-taxable (or NIC-able) there should be no agreement as to the terms of the termination of the contract between you and your employer with the contract ending without the option to work your notice - unfortunately exactly such an agreement has taken place in your case.

outgoingzero

Thanks for the reply.

In case I implied it, I'm a permanent member of staff as opposed to someone on a fixed contract. You might not have meant that but I thought I'd clear it up.

So, the fact that the extra payment (equivalent to 3 months pay) is separate from the notice which I had to work and not in my contract still makes it liable to tax? Just out of interest, couldn't they just have made it a redundancy payment saving my (and them) tax?

System

Companies often just play safe and deduct tax anyway. Then it's up to you to claim it back if you can.

getmore4less

Remind them they save NI if they pay this as redundancy

outgoingzero

Clifford_Pope wrote: »

Companies often just play safe and deduct tax anyway. Then it's up to you to claim it back if you can.

Exactly what I wondered. I suppose I have nothing to lose by at least trying to claim it back.

ceeforcat

outgoingzero wrote: »

Thanks for the reply.

In case I implied it, I'm a permanent member of staff as opposed to someone on a fixed contract. You might not have meant that but I thought I'd clear it up.

So, the fact that the extra payment (equivalent to 3 months pay) is separate from the notice which I had to work and not in my contract still makes it liable to tax? Just out of interest, couldn't they just have made it a redundancy payment saving my (and them) tax?

No - you would then be setting a precedent for future redundancies for other members of staff. I'm afraid that you have to look upon it as : Look, we are making you redundant but there is three months work for you if you want it!

jimmo

It is always worth asking the question to your employer but you really should be very pleasantly surprised if your employer agrees to pay you tax free.
If your employer does that your employer is taking on the risk of being charged the tax it should have deducted from you plus interest and penalties.
As things stand I would suggest that there is a very good chance that your employer has already suffered the consequences of getting it wrong and being punished by HMRC or they have "professional" advisers who are, quite frankly, incompetent and advise a safety first approach.
What makes me say that is that you say that your employer is describing the payment as being in lieu of notice whereas it very clearly isn't.
Payment in Lieu of Notice (PILON) is probably the most controversial aspect of redundancy in tax terms but, if you have been given the correct notice and have to work your notice period there is no way that your employer can pay you PILON.
From what you describe your employer seems to be happy to pay you a sum of money for being a good boy (or girl), not rocking the boat, and assist your employer's transition to its new life without you.
Then the question will be whether the payment to you will be a reward for service or a compensation payment because you will have lost your job.
Admittedly speaking as a taxman I would suggest that the payment is a reward for service over and above your normal contractual duties as per the case of Mudd vs Collins and taxable
http://www.hmrc.gov.uk/manuals/eimanual/EIM00730.htm
I think your employer is doing the right thing even though it probably doesn't really understand its own responsibilities.

John_Pierpoint

I was involved in a "redundancy" situation, where we were paid a year's salary to go quietly, admittedly a few years ago now.
Those of us on relatively modest salaries got the whole lot tax free, but it came as a bit of a shock to some that it was not in the form of a big cheque on the day of departure. The statutory payment was made thus, but the rest was not paid until after the date at which an allegation of unfair dismissal could be made.
Perhaps HMRC takes as closer interest in such matters these days?

outgoingzero

Thanks for all the replies.

Sounds like the consensus is that I should be paying tax on this payment. I still don't understand how it can be PILON given it isn't notice pay - but there's a lot about tax and employment law I don't understand!

At least I should get some of it back at the end of the year as I'll have paid too much tax under normal rules anyway.

thenudeone

My understanding is it depends on the contract and custom & practice.

Compensation for Breach of the Employment Contract by the employer, generally isn't taxable.

Payment under the terms of the contract (or in a way which has the same effect) is taxable.

So if the contract specifically allows the employer to give PILON, or to require employees to take "garden leave" during their notice period (which is effectively the same thing), or if such practice is customary and "expected", that payment is taxable. If you are being paid for specific duties over & above your contract, that would also be taxable.

http://www.hmrc.gov.uk/manuals/eimanual/EIM12975.htm

I also think it would be very difficult to reclaim tax already deducted by an employer, because by doing so. the employer is admitting that the payment is either contractual, customary or automatic and hence taxable.