Tax on PILON if made redundant

TrixA

I am being made redundant at the end of February. The package includes a redundancy payment plus three months PILON and payment for unused accrued holiday, which I will receive as a lump sum at the end of Feb.

I understand that the redundancy payment isn't taxable (as it's under £30k) but the PILON and holiday pay is?

Does this mean that all the PILON and holiday pay will be counted as additional salaried income for the 21/22 tax year?

My salary is around £65k, so an additional lump sum payment coming at the end of the tax year is going to be taxed entirely at the higher rate. Whereas if I was working my notice some of the income would fall into the 22/23 tax year and my overall tax bill would be lower.

Is there anything I can do to avoid this? Can I ask my employer to delay some of the payment to April? Or pay some of the PILON as AVCs into the employer pension scheme?

General_Grant

TrixA said:

I am being made redundant at the end of February. The package includes a redundancy payment plus three months PILON and payment for unused accrued holiday, which I will receive as a lump sum at the end of Feb.

I understand that the redundancy payment isn't taxable (as it's under £30k) but the PILON and holiday pay is?  Your understanding regarding taxable pay is correct - the notice and holiday pay are in respect of your employment.

Does this mean that all the PILON and holiday pay will be counted as additional salaried income for the 21/22 tax year?  The PILON and holiday pay will be included in your taxable income for 2021/22 if you receive the money before the next tax year.

My salary is around £65k, so an additional lump sum payment coming at the end of the tax year is going to be taxed entirely at the higher rate. Whereas if I was working my notice some of the income would fall into the 22/23 tax year and my overall tax bill would be lower.

Is there anything I can do to avoid this? Can I ask my employer to delay some of the payment to April? Or pay some of the PILON as AVCs into the employer pension scheme?  You can ask whatever you like.

..................

Andy_L

TrixA said:

I am being made redundant at the end of February. The package includes a redundancy payment plus three months PILON and payment for unused accrued holiday, which I will receive as a lump sum at the end of Feb.

I understand that the redundancy payment isn't taxable (as it's under £30k) but the PILON and holiday pay is?

Does this mean that all the PILON and holiday pay will be counted as additional salaried income for the 21/22 tax year?

My salary is around £65k, so an additional lump sum payment coming at the end of the tax year is going to be taxed entirely at the higher rate. Whereas if I was working my notice some of the income would fall into the 22/23 tax year and my overall tax bill would be lower.

Is there anything I can do to avoid this? Can I ask my employer to delay some of the payment to April? Or pay some of the PILON as AVCs into the employer pension scheme?

You can pay it into a private pension to avoid the Tax (but not the NI)

Grumpy_chap

As part of this process, I assume you will be required to sign a "Settlement Agreement" - you could ask as part of the negotiation in that to have the PILON paid to you at a later date or ask for the PILON to be made as employer contributions to pension (so avoiding tax plus NI).

Is the payment conditional on you signing the Settlement Agreement?  What happens if you just don't sign until 6th April?

Is it a large employer, or is there a risk of the employer failing before April, in which case get the money now.

TrixA

Yes I have to sign a Settlement Agreement. I asked the lawyer who is reviewing the agreement if I could ask to have a portion of the PILON deferred and she said no, that would be considered by HMRC as tax avoidance. I have asked her whether there's an option to ask for some of it to be paid to pension. But ultimately I need the money to tide me over until I find another job (I work in quite a niche field where there are not a huge number of openings) so I would not want to put too much into pension. The lawyer also said I could ask for garden leave instead of PILON but I don't think my employer will agree to that. 

TrixA

Sorry, to answer the other questions, it is a large employer and there's no risk of them failing before April.

I have been given 10 days to sign the Settlement Agreement. Not sure what happens if I don't sign but I would be worried I would lose the enhanced redundancy payment they're currently offering.

Grumpy_chap

TrixA said:

I have been given 10 days to sign the Settlement Agreement. Not sure what happens if I don't sign but I would be worried I would lose the enhanced redundancy payment they're currently offering.

I suspect that's likely, especially if you are considered (by the employer) to be just stringing them along.  May be different if you were in proper discussion with them but, again, they don't have much reason to negotiate or extend the period.

TrixA said:

Yes I have to sign a Settlement Agreement. I asked the lawyer who is reviewing the agreement if I could ask to have a portion of the PILON deferred and she said no, that would be considered by HMRC as tax avoidance. I have asked her whether there's an option to ask for some of it to be paid to pension. But ultimately I need the money to tide me over until I find another job (I work in quite a niche field where there are not a huge number of openings) so I would not want to put too much into pension. The lawyer also said I could ask for garden leave instead of PILON but I don't think my employer will agree to that. 

I think you have to trust that the lawyer is correct about the deferred payment and possibly being considered as tax avoidance.

Did you ask for garden leave instead of PILON?  No point in not asking just because you think the answer will be negative.

You could also ask for an increased payment to be added to the redundancy settlement to mitigate the higher amount of tax that will be suffered against the PILON.  

If you don't ask, you won't get.  The employer may be keen to get things signed so they have closed out the risk of future liability should you decide upon legal action against the business.

General_Grant

I believe tax avoidance is lawful.  For example that's what ISAs do.  Does the lawyer think you shouldn't make use of ISAs?

Perhaps she's not an expert on tax and thinks avoidance is the same as evasion.

wolvoman

General_Grant said:

I believe tax avoidance is lawful.  For example that's what ISAs do.  Does the lawyer think you shouldn't make use of ISAs?

Perhaps she's not an expert on tax and thinks avoidance is the same as evasion.

If HMRC investigates, it’s irrelevant whether it’s avoidance or evasion. They’ll assume you’re guilty and make your life difficult.

Hard to justify a gap in payments, given your employment would have already ended. The employer won’t go for this.

On the bright side, you’ll save a ton of employee NI as it’s calculated over a pay period and not a tax year.
You’ll save approx £700 this way.

happyc84

Take the money and move on. No easy to do but focus on your future.

paddcomp

TrixA,
I'm going though a redundancy (albeit is voluntary) at the moment and the brief we've been given is that PILON payments are subject to tax and NI, and only £30k of additional severance pay is tax free.  Additional payment above £30k and not a PILON is taxable but not subject to NI.  After your last day in work and once a P45 is issued any payments post this are taxed without an annual tax allowance (0T month 1), so you'll over pay and need to claim back.
As said previously you can only avoid this tax by commuting some of the payment to a registered UK pension scheme.