Will receiving all my holiday as a lump sum payment cause excessive tax?

pendulum666

Hi all,

I am in credit with my holiday by several weeks and currently serving my notice period. I am about to put a request in to take it all during my notice period but have reason to believe it may be refused.

The timing of when I start my new job vs my current one keeping me for my full (and long) notice period, means I will walk out of my current job on a Friday and start at my new job on a Monday.

I am concerned that if my current company refuses me weeks worth of holiday and then instead states that it will pay me for them as a lump sum upon termination of employment, that it will attract a high rate of tax upon the entire payment, because I will receive my normal pay for that month along with an additional payment of almost another months pay.

What I currently earn already puts me in the higher rate tax bracket for a portion of my pay and therefore ANY further overtime I do during that month attracts 42% rate of tax. Does this mean that upon termination all my holiday will be taxed at 42% as well?

Perhaps I have misunderstood? I would rather take the holiday than have it taxed at the higher rate.



Additionally, if my current company do agree to me taking all of my holiday and I take the final 4 weeks of my notice period as holiday, I assume my leave date is still the same and not brought forward, which means I cannot work for my new company "early" whilst on holiday legally? Or can I? Would this also attract the higher rate of tax on ALL my new company earnings for that period?

Thank you

nicechap

You are normally paid for your holiday.

What you are asking is can I reduce my tax when I have in effect 2 jobs.

You will be taxed on your entire earnings within the entire tax year, whether paid in 12 monthly payments or 2 lump payments or whatever other combination you can think of. If you "overpay" tax in one month, HMRC can send your new employer a new tax code so less is paid for the remainder months of the year, or you can get a refund at end of the year.

pendulum666

Yes. I guess I was over complicating it. As you say, it will adjust.

The last time I changed jobs HMRC wrote to me after about a year saying I owed them about a grand, due to under payment of tax. Is there a way I can stop this happening again? I'm not sure what I am meant to do to ensure I have the right tax code each month when it is all automated anyway?

nicechap wrote: »

You are normally paid for your holiday.

Sorry, what do you mean exactly?

Guest101

pendulum666 wrote: »

Yes. I guess I was over complicating it. As you say, it will adjust.

The last time I changed jobs HMRC wrote to me after about a year saying I owed them about a grand, due to under payment of tax. Is there a way I can stop this happening again? I'm not sure what I am meant to do to ensure I have the right tax code each month when it is all automated anyway?



Sorry, what do you mean exactly?

What they mean is that your salary includes holiday, so is taxed the same way.


Hypothetically you take a month's holiday, you are paid the same as if you had worked that month

agrinnall

pendulum666 wrote: »

The last time I changed jobs HMRC wrote to me after about a year saying I owed them about a grand, due to under payment of tax. Is there a way I can stop this happening again? I'm not sure what I am meant to do to ensure I have the right tax code each month when it is all automated anyway?

You don't need to do anything as long as HMRC are aware that you only have one job at a time (primarily achieved by handing your P45 to your new employer). As long as they know that your tax code will be correct and your tax due in the current tax year will sort itself out by April and there will not be an underpayment. What you can do to help is to check that your tax code at the new job is correct, by the second pay period there if it's not right in the first, and contact HMRC to get it fixed if it's not right.

pendulum666

Guest101 wrote: »

What they mean is that your salary includes holiday, so is taxed the same way.


Hypothetically you take a month's holiday, you are paid the same as if you had worked that month

Thank you. What I mean is in scenario 1 below, I will obviously be paid the same as normal yes. But in scenario 2 I think I would be taxed heavily?

1: I work my notice period of 8 weeks but take the last 4 weeks as holiday. I get paid approx 2 months wages as normal.

2: I work my notice period of 8 weeks and take no holiday as it is refused. The holiday is paid as a lump sum on top of 2 months wages.


In scenario 2 I am paid 1 month wage as normal but on the 2nd month pay slip, rather than being paid double a months wages due to the additional 4 week holiday lump sum, the 4 weeks is taxed fully at the higher rate because for that month I have already earned over my personal allowance and over the lower rate tax threshold.

I'm asking if this is the case, or would the holiday be taxed at normal rate. I don't understand which.

The reason for asking is obviously that it is a little harsh to refuse me my holiday if it works out worse off financially being paid them as a lump sum.

nicechap

Without knowing how much you earn and your personal tax code we can't answer your question properly.

You will be taxed on the total amount you earn in the year, not the month, less your personal allowance.

If too much tax is paid, you can claim it back, if too little, HMRC will ask for it, either as a lump sum or by adjusting your next year's tax code.

jobbingmusician

I think you should be able to work out your tax for yourself. You are correct that if you are paid for untaken holiday in one lump sum the tax will be high that month. And yes, if you are in the higher tax bracket then all this extra pay will be taxed at 40%.

Have a look at https://www.gov.uk/government/publications/rates-and-allowances-income-tax/income-tax-rates-and-allowances-current-and-past

You are charged 40% tax on any earnings in the tax year over £33,500. And 45% tax on any earnings over £150k (your confusing reference to 42% leaves me unsure to which band you refer).

itchyfeet123

pendulum666 wrote: »

In scenario 2 I am paid 1 month wage as normal but on the 2nd month pay slip, rather than being paid double a months wages due to the additional 4 week holiday lump sum, the 4 weeks is taxed fully at the higher rate because for that month I have already earned over my personal allowance and over the lower rate tax threshold.

I'm asking if this is the case, or would the holiday be taxed at normal rate. I don't understand which.

The reason for asking is obviously that it is a little harsh to refuse me my holiday if it works out worse off financially being paid them as a lump sum.

You'll probably be taxed at the higher rate on all your holiday pay, because as you say, you have already earned over the allowance and lower rate threshold. But unless your tax rate is 100%, you'll still end up with more money in your pocket if you get paid out for your holidays than if you use them.

getmore4less

If your new job will also be over £45k then the holiday pay is just extra pay that month.

If you change mid month watch out for over/under payment as the allowance and 20% band should get used on one job only.


If you want to reduce tax look at pension contributions.

JJG

jobbingmusician wrote: »

(your confusing reference to 42% leaves me unsure to which band you refer).

It'll be the 40% tax band as well as the 2% national insurance payment.