Tax on earnings after redundacy

JSH333
JSH333 Posts: 13
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edited 20 November 2020 at 6:35AM in Redundancy & redundancy planning
Hi All,

Id like to give a scenario which would answer my question about my own Voluntary redundancy tax situation.
For simplicity, lets assume no personally allowance and just the non taxable settlement sum without any pay in lieu etc.
If someone earns say, £30k after 6 months into the financial year, then receives a voluntary settlement sum of £25k.

Due to the redundancy sum being under £30k, it isn't taxed and would get the full £25k.
But what happens when that person starts working again, is the redundancy counted into earnings?
So either it isn't, and that person would remain paying basic rate tax.
Or it is, and that would end up earning them £55k so far that year, pushing them into the higher rate tax band for any earnings going forward?

I've seen plenty of guides on how the tax on the redundancy itself is handled, but not much afterwards.
Any thoughts appreciated.
Thanks, J.

Comments

  • comeandgo
    comeandgo Posts: 5,713
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    If you have received any tax free redundancy payments then they are tax free for the whole tax year.  The payments are not included in your gross taxable figure.
  • chrisbur
    chrisbur Posts: 4,014
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    edited 21 November 2020 at 6:51PM
    As advised there is no tax on redundancy payments up to £30K and that does not change whatever happens after the redundancy. In your example of someone earning £30k as at month six you do not seem to understand how PAYE works.  Assuming the normal tax free allowance you get £12500 with no tax due then £37500 with tax due at 20% then tax is due at 40% bur these allowances are not given until the last payday of the tax year.  That means that at month 6 you get half these amounts so £6250 with no tax then £18700 at 20% and £5000 at 40% so tax due is £5750,  In this way with the bands being increased by 1/12 of the yearly allowance you avoid the situation of suddenly  having to pay at the higher rate on all your earnings.
    Also as tax due is always calculated on your taxable earnings to date the system adjusts tax bands if needed.  So if you earned less going forward some or possibly all of the tax you had paid at 40% would be converted to tax at 20%.
    The figures I have used have been simplified a little; actual PAYE figures are slightly different.
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