Redundancy Payment in Leiu - taxable?

Cashby

Hello,

I am about to take a "compromise agreement" rather than return to work after maternity leave. There is no clause in my contract about payment in leiu of notice. They are paying me a considerable sum for my notice period. I'm told that as it is not mentioned in my contract the company can pay this money to me tax free. If this is correct how do I go about asking the company to do this for me as they plan to pay it taxed?

Thanks for your help.

tigtag02

If its not specifically written into your t&c's that the PILON isn't taxable then it will attrct tax and NI deductions.

Compromise agreements are all about whats written down and what you sign to.

Chi_2

If it is a bona fide redundancy payment, then it is free of NI, and tax-free for the first £30,000.

http://www.hmrc.gov.uk/guidance/redundancy-factsheet.pdf

Now, redundancy is not necessarily the same as "payment in lieu of notice," (when I quit a job, I can get PILON, but it is fully taxable) so be careful that it is actually a redundancy payment you are getting... and I have a sneaking suspicion that your "compromise agreement" isn't *really* a redundancy payment, and so is taxable.

If I were you, I'd get on the phone to HMRC and get advice.

jimmo

On termination of employment there are, for tax purposes, basically two types of payment. Contractual payments are taxable in full as earnings but non-contractual, or compensation payments, have an exemption of the first £30,000. If the compensation payment exceeds £30,000 the balance over £30,000 is fully taxable.
If your contract of employment states that you are entitled to 6 months notice but says absolutely nothing about what will happen if your employer fails to give you 6 months notice any payment of payment in lieu of notice (pilon) will be treated as compensation.
If your contract of employment says that you are entitled to six months notice but, if it is not possible to give you 6 months notice a payment in lieu of notice may be given instead the pilon is a contractual right and taxable as income.
You really need to study your contract of employment very carefully.
If your employer is planning to tax the payment you could ask for an explanation from him.
Larger employers tend to get this right.
As usual, the devil is in the detail. If you are prepared to post details of everything you are about to receive we can start to look for answers.

HugoSP

I worked for one company that paid a generous redundanacy package that effectively replaced (and was much more than) the national minimum and PILON.

It was written into an agreement that I signed (IIRC) that this lump sum payment was in leu of the other payments that I would normally be entitled to by law, and in accepting the lump sum payment I was forfeitting the minimum terms and any PILON that I was due.

The resulting redundancy payment was tax free up to £30k.

There was no mention in the Ts and Cs about this. It is just something the company decided to do when they announced redundancies. However, as was effectively a change to the Ts and Cs then they had to get individual consent to do this. No one was going to obstruct them as it meant that on average any redundant employee would receive around 3 to 4 x the payoff.

Suggest that the OP asks the company to substitute the PILON for a lump sum redundancy payment of the same gross figure, but run this past someone at HMRC first.

This was despite the fact that the lump sum payment was calculated on length of service.

Cashby

Hllo, may I ask for some further help please? My contract states:

"Your employment may be terminated by the Company giving the greater of 4 weeks written notice or the minimum statutory notice set out in the employment Rights Act 1996. You are required to give the company at least 4 weeks written notice should you wish to terminate your employment. The company also has the right to terminate your employment without notice if you are in serious breach of your contract, are grossly negligent or commit an act of gross miscounduct. In any event your employment will automatically cease when you reach the companys normal retirement age which is 65. On termination of your employment you must return all Company property, including but not limited to documents (in hard copy or machine readable form), keys, security pases, credit cards, computer and other office equipment."

So based on your knowledge and words below does this mean I can have it tax free? There is no mention of payment in leiu of notice if the notice can not be worked.

jimmo wrote: »

On termination of employment there are, for tax purposes, basically two types of payment. Contractual payments are taxable in full as earnings but non-contractual, or compensation payments, have an exemption of the first £30,000. If the compensation payment exceeds £30,000 the balance over £30,000 is fully taxable.
If your contract of employment states that you are entitled to 6 months notice but says absolutely nothing about what will happen if your employer fails to give you 6 months notice any payment of payment in lieu of notice (pilon) will be treated as compensation.
If your contract of employment says that you are entitled to six months notice but, if it is not possible to give you 6 months notice a payment in lieu of notice may be given instead the pilon is a contractual right and taxable as income.
You really need to study your contract of employment very carefully.
If your employer is planning to tax the payment you could ask for an explanation from him.
Larger employers tend to get this right.
As usual, the devil is in the detail. If you are prepared to post details of everything you are about to receive we can start to look for answers.

travellingaussie

I have a similar question. I am about to receive my notice of redundancy. So I am entitled to my redundancy payment and my notice period of 3 months. The company will pay me in leiu of 2 1/2 of those 3 months, however my contract makes no mention of payments in leiu. My understanding is that it would therefore be tax free also yet my company insists they will tax it. If they do how do I go about getting the money back? Am I right in thinking it should not be taxed?

Also I have a company car, private health etc that they will take in two weeks time even though they are benefits of my job. Should they be paying me out for these also and should these be taxed?

travellingaussie

Reason I know that they will pay the 2 1/2 in payment in leiu is because they really have no idea and rather then doing a proper consulting period they have pulled myself and a collegue out from 4 engineers and told us both that we are at risk, and then in a letter put we would only be required to work till end of december...that leaves 2 1/2 months out of the 3 months notice they need to give me. the rest in the sample letter is payment in leiu. it is not at all a common practice for my company infact they would usually put one on gardening leave or keep them working, the fact that they are making us redundant says really that there isn't work for us so it would look a bit odd if they did either of those two. so isn't it really a breach of contract and therefore compensation and therefore tax free?

my hr department who are doing this are hopeless and give no answers to anything that is asked, they have been extremely vague throughout and now say the payment will be taxed, i need to find out another source of information and / or how to get the money back if they pay tax on it as it will make a hugh difference to the amount i receive. It is a large company, one of the top three in my industry - yet hr is hopeless

joanie

Just to add my experience..... I was made redundant in January and my REDUNDANCY payment was tax free but my pay in lieu of notice was taxed. I understand this to be the usual situation because it is PAY - they just don't require you to go to work . Personally this was a bonus... some of my colleagues had to work their notice... i got to sit at home and get paid while looking for other work.

good luck,

silvercar

travellingaussie wrote: »

Also I have a company car, private health etc that they will take in two weeks time even though they are benefits of my job. Should they be paying me out for these also and should these be taxed?

All subject to negotiation. I once had 3 months notice and insisted that I was entitled to keep the car and other benefits for the full notice term. If they are not going to offer compensation for loss of benefits, they need to honour the contract terms. They backed down almost immediately and I kept the car and health benefits after receiving the redundancy payment. If you do win this, make sure they are aware that they will have to inform the car insurers that you are no longer an employee but still need to be insured. If the company intends handing the car back to the lease company, you may have the opportunity to buy it from the lease company cheaply.

Contact the private health company, they often allow ex-employees to continue the health cover with no break. Even though you will have to pay, it is often at a reduced rate. You may want to consider getting the health cover to give you continuety on existing conditions.