Redundancy Payment Looming - Concerned about tax

jimmo

I've just noticed that I got the figures a bit wrong yesterday, used pay of £18300 instead of £17,500 and made a typo. Sorry about that but for a taxable payment of £17,500 in June you should pay:
2875 at 20% = £575.00
9625 at 40% =£3850.00
5000 at 45% =£2250.00
Total £ 6675.00
For you the problem is the PAYE system. When you are put on a month1 basis each month's pay is taken in isolation. In June, when you are paid £17,500 you will be taxed as if you were earning £210,000pa and you will pay tax as above.
This system imposing code 0T month1 is relatively new. Before that employers used to have to deduct tax at 20% from payments after leaving. That would have suited your situation much better but the problem for HMRC then was that those who were actually liable to higher rates suddenly found rather large tax bills landing on them after they had spent the money. HMRC got a lot of flak for that.
You will definitely get any excessive tax deductions back but, as had been said already by others, a lot depends on what you do next.
If you get a new job it will be sorted through PAYE on your wages.
If you don't, and don't claim the dole, you can claim unemployment repayments from HMRC using form P50.
In my opinion the big thing to be wary of is claiming the dole. If you do claim the dole that counts as another job for tax purposes but DWP don't operate PAYE in the normal way. At best you will get the excessive tax back when you sign off or at the end of the tax year in April 2019.
On the other hand claiming the dole gives you National Insurance credits which could be important for your State Pension when you reach retirement age, not to mention a bit of regular income.
I don't know the answer to that. You might want to ask on the Benefits and Tax Credits board.

italianie

jimmo wrote: »

I've just noticed that I got the figures a bit wrong yesterday, used pay of £18300 instead of £17,500 and made a typo. Sorry about that but for a taxable payment of £17,500 in June you should pay:
2875 at 20% = £575.00
9625 at 40% =£3850.00
5000 at 45% =£2250.00
Total £ 6675.00
For you the problem is the PAYE system. When you are put on a month1 basis each month's pay is taken in isolation. In June, when you are paid £17,500 you will be taxed as if you were earning £210,000pa and you will pay tax as above.
This system imposing code 0T month1 is relatively new. Before that employers used to have to deduct tax at 20% from payments after leaving. That would have suited your situation much better but the problem for HMRC then was that those who were actually liable to higher rates suddenly found rather large tax bills landing on them after they had spent the money. HMRC got a lot of flak for that.
You will definitely get any excessive tax deductions back but, as had been said already by others, a lot depends on what you do next.
If you get a new job it will be sorted through PAYE on your wages.
If you don't, and don't claim the dole, you can claim unemployment repayments from HMRC using form P50.
In my opinion the big thing to be wary of is claiming the dole. If you do claim the dole that counts as another job for tax purposes but DWP don't operate PAYE in the normal way. At best you will get the excessive tax back when you sign off or at the end of the tax year in April 2019.
On the other hand claiming the dole gives you National Insurance credits which could be important for your State Pension when you reach retirement age, not to mention a bit of regular income.
I don't know the answer to that. You might want to ask on the Benefits and Tax Credits board.

Thanks your reply, I understand much better how it might work out from reading the above. It might be possible for me to negotiate with my employer to have the lump sum paid on my final pay day of 15th of May, this would mean it would go onto my normal wage, which should mean it is paid under my normal tax code. Would that work out better in terms of paying less tax then code OT Month 1? I can ask them, as leaving it till June 15th wouldn't be great, as I'll be living off just 6 days pay for May.

I wasn't planning on claiming job-seekers, but someone did mention to me the state pensions credit thing and recommended doing it. It would seem the best way to maximize the lump sum would be to take time off work until the next financial year. This might be possible, it all depends on whether my wife can go full time from May. My original plan was to seek out new work after taking a break for 2 to 3 months from leaving, but that was on the basis I wouldn't get taxed as much as you indicate.

Linton

italianie wrote: »

Thanks your reply, I understand much better how it might work out from reading the above. It might be possible for me to negotiate with my employer to have the lump sum paid on my final pay day of 15th of May, this would mean it would go onto my normal wage, which should mean it is paid under my normal tax code. Would that work out better in terms of paying less tax then code OT Month 1? I can ask them, as leaving it till June 15th wouldn't be great, as I'll be living off just 6 days pay for May.

........

Paying it in May wont help a lot since May is Month 2. PAYE works by accumulating tax allowances and tax band values over the year so in May you wont have accumulated very much. You can ask but it could well be the case that they wont have the final values of holiday pay etc until you leave.

chrisbur

italianie wrote: »

I wasn't planning on claiming job-seekers, but someone did mention to me the state pensions credit thing and recommended doing it. It would seem the best way to maximize the lump sum would be to take time off work until the next financial year. This might be possible, it all depends on whether my wife can go full time from May. My original plan was to seek out new work after taking a break for 2 to 3 months from leaving, but that was on the basis I wouldn't get taxed as much as you indicate.

I have not been following this post very closely so apologies if my figures are a bit adrift.
It seems to me that you are looking too closely at the tax you will pay on your lump sum on its payment rather than the tax you will eventually pay on it. Your earnings for next year appear to me to be one and a bit months salary possibly some owed holiday pay and 17500 redundancy lets say about 25,000. This leaves you something like 20,000 short of the amount on which 40% tax will be paid.
So even taking another job (perhaps part time) after a break of say a month or two could well still see you paying only 20% tax.
Even if you did go into the 40% tax band there is a simple rule of thumb about income tax....The more you pay the more you get in your pocket. The amount you get may reduce as the bands go up but you will always get more in your pocket than if you did not go into the next tax band.
Yes it is true that you will pay extra tax when the money is paid but that excess will eventually come back to you.
If you did take another job as you received pay from that your tax position would be adjusted as the year progressed and excess tax would be repaid in that job.
I have to admit that I have not been involved in PAYE for a few years, in my day HMRC would not know about payments made after the issue of a P45 until the tax year end but I believe that things have now changed (real time reporting) and they will be advised when the payment is made so hopefully this would be included in this years earnings at the time of payment. Might involve contacting HMRC to arrange this though.

italianie

chrisbur wrote: »

I have not been following this post very closely so apologies if my figures are a bit adrift.
It seems to me that you are looking too closely at the tax you will pay on your lump sum on its payment rather than the tax you will eventually pay on it. Your earnings for next year appear to me to be one and a bit months salary possibly some owed holiday pay and 17500 redundancy lets say about 25,000. This leaves you something like 20,000 short of the amount on which 40% tax will be paid.
So even taking another job (perhaps part time) after a break of say a month or two could well still see you paying only 20% tax.
Even if you did go into the 40% tax band there is a simple rule of thumb about income tax....The more you pay the more you get in your pocket. The amount you get may reduce as the bands go up but you will always get more in your pocket than if you did not go into the next tax band.
Yes it is true that you will pay extra tax when the money is paid but that excess will eventually come back to you.
If you did take another job as you received pay from that your tax position would be adjusted as the year progressed and excess tax would be repaid in that job.
I have to admit that I have not been involved in PAYE for a few years, in my day HMRC would not know about payments made after the issue of a P45 until the tax year end but I believe that things have now changed (real time reporting) and they will be advised when the payment is made so hopefully this would be included in this years earnings at the time of payment. Might involve contacting HMRC to arrange this though.

Thanks for explaining this, that's definitely a more positive and realistic way of looking at it. I know the tax would come back to me eventually, but I'd rather have the tax back in a lump or not have it deducted at all to the extent mentioned. Reason being, I wanted to pay the remaining mortgage and car loan off in one swoop, leaving a bit left over for survival for a few months whilst I take a break and find new work. By clearing the car and mortgage this would allow living on a reduced income. In reality, I'll be loosing a yearly salary of nearly £39,000 upon exit, I don't think I'll earn anywhere near that much in my next employment as I'm looking for a complete career change and my current earnings are due to the length of time I've been with my company. I might have to start again over again on £20 - £25k a year or maybe much less. This would be quite possible with the mortgage and car paid, I'm not fixated on earning more money or matching my current salary, I'd rather choose a job I enjoy and earn less. I also don't know what I what to do yet, so I wanted to take time to figure it out. Self employment might also be an option.

If they tax me 7 grand and I only get £41,000 up front, the car doesn't get paid off, only the mortgage and it doesn't leave me much for survival or to have a break. I'd sort of planned this whole transition quite precisely, and never assumed the up front tax would be more then 3 grand, now I see it's looking 7 ish. I did phone HMRC and they told me they could refund me the tax back in around 4 weeks, but I'd have to declare I wasn't going to work between then and April 5th 2019 to get it back!!

chrisbur

italianie wrote: »

Thanks for explaining this, that's definitely a more positive and realistic way of looking at it. I know the tax would come back to me eventually, but I'd rather have the tax back in a lump or not have it deducted at all to the extent mentioned. Reason being, I wanted to pay the remaining mortgage and car loan off in one swoop, leaving a bit left over for survival for a few months whilst I take a break and find new work. By clearing the car and mortgage this would allow living on a reduced income. In reality, I'll be loosing a yearly salary of nearly £39,000 upon exit, I don't think I'll earn anywhere near that much in my next employment as I'm looking for a complete career change and my current earnings are due to the length of time I've been with my company. I might have to start again over again on £20 - £25k a year or maybe much less. This would be quite possible with the mortgage and car paid, I'm not fixated on earning more money or matching my current salary, I'd rather choose a job I enjoy and earn less. I also don't know what I what to do yet, so I wanted to take time to figure it out. Self employment might also be an option.

If they tax me 7 grand and I only get £41,000 up front, the car doesn't get paid off, only the mortgage and it doesn't leave me much for survival or to have a break. I'd sort of planned this whole transition quite precisely, and never assumed the up front tax would be more then 3 grand, now I see it's looking 7 ish. I did phone HMRC and they told me they could refund me the tax back in around 4 weeks, but I'd have to declare I wasn't going to work between then and April 5th 2019 to get it back!!

Before choosing which to pay off first I would check the interest rates; might be better to pay off the car and perhaps some mortgage.
Regarding getting a refund why not declare that you "do not intend to work" if you later find you have to "unfortunately change your plans" HMRC will work out a way to get any tax from you if it needs to.

italianie

chrisbur wrote: »

Before choosing which to pay off first I would check the interest rates; might be better to pay off the car and perhaps some mortgage.
Regarding getting a refund why not declare that you "do not intend to work" if you later find you have to "unfortunately change your plans" HMRC will work out a way to get any tax from you if it needs to.

Now that sounds like a plan to me!! Thanks for the advice, that might just be the best way to do it, declare no intention to work, then see how it goes and they can adjust things if I do find work at some point. Yes weighing up the mortgage and car options, not much difference in the interest but car is slightly higher.