Lump sum payment due to ill health

Aaron37

Hello,
a friend of mine was diagnosed with cancer a few years ago, and underwent chemotherapy treatment that nearly killed her. She appears to be recovering well from the cancer, but the chemo has caused a lot of health problems. She has been unable to work and is still medically signed off work.
Her employer's insurance providers have decided to pay a lump sum, and shortly afterwards the company decided to terminate her employment on the grounds of incapacity/ill health (has not decided whether to appeal or not). The job is still available (for someone else obviously) so it is not a redundancy.

The problem is that the tax paid on the lump sum was not far off 50%. Payroll is just following instructions from HR, who don't really seem to be very sure themselves (judging from the confused correspondence I've seen).

Can this tax be recovered from HMRC? Do the circumstances permit a tax free payment?
The payment was put through with PAYE, and she was taxed as a high earner. Even though she's had very little income for the previous 3 years, and may not ever work again.

Any advice would be much appreciated, thank you.

Aaron

agrinnall

What was the amount, what is her tax code, and what other taxable earnings has she had / will have in this tax year?

Aaron37

The lump sum amount was circa £90K (pre-tax), no other taxable earnings. I'll need to get the tax code, I know she had been earning circa £35K/yr before being signed off work in 2012. Had been paid virtually nothing for several months before the lump sum payment was made.

patanne

Is an insurance payout taxable?

agrinnall

I can't comment on how it should be treated but paying £90,000 through PAYE with no other taxable income, assuming a tax code of 1060L, will result in tax of £25,304 being due. She may well have paid more than that at this time but should be able to reclaim any overpayment from HMRC. She'll also have had NI deducted, but how much this will be or whether some or all of it can be reclaimed I don't know.

xylophone

How is the payment described? Is it a compensation for loss of employment? An ill health insurance payment? A payment in lieu of notice?

Was she previously receiving sick pay from the employer?

Is there an occupational pension scheme which will pay out before scheme pension age on grounds of ill health?

Aaron37

Thanks for the replies!
The lump sum was paid through normal payroll, and tax and national insurance were deducted. It was not pension related, as far as I'm aware.
She was in receipt of sick pay. After statutory sick pay had expired after 6 months, the insurers began paying a monthly amount, then stopped several months before the lump sum whilst they "assessed" the case. They wanted a GP report, and oncologist report before they would continue.

They never chased up the request (request just sat at GP office), so this caused a several month delay. Some strongly worded e-mails were sent to HR, then suddenly a decision was made to pay to pay the remaining insurers liability, which was calculated based on 10% earnings multiplied by the remaining years liable (rest of career, well over 20 years remaining). They said this was because based on the evidence they had (symptoms, ill health, etc), it was unlikely a return to work would ever be likely.

HR haven't really explained anything, and are rather vague when it comes to answering specific questions. So I don't really know what category or title this payment would have? I can try to find out.

xylophone

I think your friend (or you as her agent) may need to clarify the situation with HMRC. HMRC will need to decide on what type of payment it is for taxation purposes.

And who has made the payment? The employer? The insurer?

You will probably have to start by ringing the general enquiry number and ask to be referred to a specialist - you will need to have all the facts at hand and may well be asked to put them in writing for a ruling.

What about her pension situation?

And what about her state pension situation?

Aaron37

Thanks xylophone, we shall do that.
The payment was definitely made by the insurer (but was paid through the company via payroll). The company is a corporation and very large, and works quite closely with the insurers in cases like this.
As for the pension scheme, I'm not aware of any arrangements but I'll try to find out.