Redundancy Payment Looming - Concerned about tax

Dazed_and_confused

If the £18,300 was being paid by 5 May (month 1 of the tax year) and you had a big standard tax code then you would have about £6.5k tax deducted.

But as it's being paid in month 2 (period to 5 June) the tax will be less (assuming you have got a cumulative tax code).

As you haven't said what your taxable income will be in your April pay its impossible to say what the tax might be.

italianie

Dazed_and_confused wrote: »

If the £18,300 was being paid by 5 May (month 1 of the tax year) and you had a big standard tax code then you would have about £6.5k tax deducted.

But as it's being paid in month 2 (period to 5 June) the tax will be less (assuming you have got a cumulative tax code).

As you haven't said what your taxable income will be in your April pay its impossible to say what the tax might be.

The £18,300 will be paid on 15th of May to be exact, the £30,000 tax free also on the same. My current tax code is 1162L / 0, not sure if that will change before may. My normal monthly gross income is £3235 that would be the amount I would get on 15th April. Pay is done 2 weeks in advance / 2 weeks in arrears. I'm advised I will only get 6 days pay in May, which I just estimated to be around £800.

Any idea what I might get taxed based on that?

italianie

I've just found out the lump sum with actually be paid on 15th of June, so that will mean I'll only get 6 days pay on 15th of May which is a bit worrying, not much to live off. I might ask the employer if they can pay the lump sum earlier on 15th of May, otherwise I'll need to try and put money aside to tide me over. I don't know from a tax point of view if there would be any benefit to having the lump sum paid in June? Any advice welcome, slightly worried finding this out.

molerat

Getting it in June will give you more in as you have another month of tax free allowance but it will not affect the big picture over the year.

italianie

molerat wrote: »

Getting it in June will give you more in as you have another month of tax free allowance but it will not affect the big picture over the year.

So I might have to grit my teeth and hang on until 15th June!! What I'm worried about really is surviving on only 6 days pay, from 15th of May to 15th of June before the lump sum lands and I can reduce my outgoings. I am not going straight into another job and wanted to take a break after 20 years working. I could try and be as frugal as possible and save a bit in my next two pay days. The alternative is I could speak to my pay roll section and see if they can bring the lump sum forward to 15th of May. Not sure what to do, lost sleep last night worrying about this. I'd rather do it in the way that gives me the least initial tax deduction on the lump sum and not have to worry about claiming back tax.

Dazed_and_confused

April 15th - let's assume taxable pay is £3235 with a presumed tax code of 1197L. Tax deducted would be £447.20

May 15th - assume taxable pay is now £4035 with a presumed tax code of 1197L. Tax due would be £407.60 so you would get a tax refund of £39.60 in your May wages.

June 15th - assume tax pay is now £21535 with a presumed tax code of 1197L. Tax due would be £5741 so you would have £5333.40 tax deducted in June.

How and when you could get and tax refund after then relies entirely on what you do after leaving this company. Far too many permutations to speculate without you being clear about what you plan to do over the rest of the tax year.

italianie

Dazed_and_confused wrote: »

April 15th - let's assume taxable pay is £3235 with a presumed tax code of 1197L. Tax deducted would be £447.20

May 15th - assume taxable pay is now £4035 with a presumed tax code of 1197L. Tax due would be £407.60 so you would get a tax refund of £39.60 in your May wages.

June 15th - assume tax pay is now £21535 with a presumed tax code of 1197L. Tax due would be £5741 so you would have £5333.40 tax deducted in June.

How and when you could get and tax refund after then relies entirely on what you do after leaving this company. Far too many permutations to speculate without you being clear about what you plan to do over the rest of the tax year.

Thanks for this, that makes it clearer. I might take a year off if I can afford to, so will not work until the next tax year.

Dazed_and_confused

If that's what you decide then after you have received your P45 you can apply to HMRC for a refund using form P50.

jimmo

Dazed_and_confused wrote: »

June 15th - assume tax pay is now £21535 with a presumed tax code of 1197L. Tax due would be £5741 so you would have £5333.40 tax deducted in June.

How and when you could get and tax refund after then relies entirely on what you do after leaving this company. Far too many permutations to speculate without you being clear about what you plan to do over the rest of the tax year.

Whilst that is a possibility it is much more common for an employer to issue form P45 with the final wages (in this case on 15 May) and then treat the redundancy payment as a Payment After Leaving.
See Paying an employee after giving them P45 here.
https://www.gov.uk/employee-leaving
In which case Code 0T will apply on a month 1 basis and the tax calculation will be roughly :
2784 at 20% = 20% £574.80
9625 at 40% = 40% £3850.00
5801 at 45% = 45% £2610.45
Total £ 7035.25.
With regard to National Insurance the current rules are that nothing is charged on compensation payments.
https://www.gov.uk/staff-redundant/redundancy-pay
There is talk that National Insurance treatment is to be aligned with tax treatment for employers from April 2018 but I haven't found anything to suggest that employees will be effected.
https://www.accountancylive.com/budget-2016-employer-nics-termination-payments-2018

italianie

jimmo wrote: »

Whilst that is a possibility it is much more common for an employer to issue form P45 with the final wages (in this case on 15 May) and then treat the redundancy payment as a Payment After Leaving.
See Paying an employee after giving them P45 here.
https://www.gov.uk/employee-leaving
In which case Code 0T will apply on a month 1 basis and the tax calculation will be roughly :
2784 at 20% = 20% £574.80
9625 at 40% = 40% £3850.00
5801 at 45% = 45% £2610.45
Total £ 7035.25.
With regard to National Insurance the current rules are that nothing is charged on compensation payments.
https://www.gov.uk/staff-redundant/redundancy-pay
There is talk that National Insurance treatment is to be aligned with tax treatment for employers from April 2018 but I haven't found anything to suggest that employees will be effected.
https://www.accountancylive.com/budget-2016-employer-nics-termination-payments-2018

This really isn't making much sense to me. How can a person who's been made redundant be taxed so heavily on redundancy money, when they need money to survive and readjust, as they are no longer receiving a regular income.

I'm not a higher rate tax payer and just working this out on the basis I'm paid £47,500 in redundancy compensation, anything above the £30,0000 tax free limit should be taxed at normal income tax rate of 20%, in my case this would be £3500 tax off £17500, so overall I should be be paid £45000 in compensation. Then if you factor in the £11,500 yearly tax allowance, I should deduct this and only pay tax on £6000 of £17,500 at 20% which would be a total of £1200 tax and I'd therefore receive £46300 in my lump sum (this is on the basis I don't return to work and earn more within the tax year.)

So if HMRC are going to tax me £7035,25 up front (why, I do not get?) then they will surely owe me £5835.25. I'd want that paid back to me as soon as possible, as it affects my budgeting and survival money!!

Am I being unreasonable or missing the obvious in thinking this should be how it works?