Will I pay higher rate of Tax on PILON (pay in lieu of notice)

Windyblade

Hi Newbie here,
I am about to be made redundant and part of the package is a PILON payment of 11 weeks pay (£6966.85), as I don't have to work the notice I will receive this as a lump sum. As such, will I pay a higher rate of tax, because it looks like my monthly pay has jumped massively and push me into a higher tax band, or will I have my usual rate applied? I can't seem to get a definitive answer scouring the web or using calculators as they all convert it to annual, which then puts me in 40% tax bracket. Current tax code is 1257L
Essentially I'm wondering what I'll end up with from the above figure after tax and NI. TIA

chrisbur

Without knowing your taxable pay to date for the last salary before the final payment there is no way of knowing what tax will be deducted from your final payment.  The tax deducted will be based on your total taxable pay to date which may or may not put some of that payment into the 40% tax band.  
Whether that 40% tax remains will then depend on your taxable earnings for the rest of the year.  For example let us say you do pay some tax at 40% but at the last month of the tax year your earnings are below the level for 40% tax you will have had all the tax you paid at 40% converted to tax at 20%.
If you can give a rough idea of what your taxable pay to date will be when you get your final payment and the date this will be paid better figures can be given.
 You will never find an answer to this question as it all depends on the figures involved and the point in the tax year that it happens.

Windyblade

chrisbur said:

Without knowing your taxable pay to date for the last salary before the final payment there is no way of knowing what tax will be deducted from your final payment.  The tax deducted will be based on your total taxable pay to date which may or may not put some of that payment into the 40% tax band.  
Whether that 40% tax remains will then depend on your taxable earnings for the rest of the year.  For example let us say you do pay some tax at 40% but at the last month of the tax year your earnings are below the level for 40% tax you will have had all the tax you paid at 40% converted to tax at 20%.
If you can give a rough idea of what your taxable pay to date will be when you get your final payment and the date this will be paid better figures can be given.
 You will never find an answer to this question as it all depends on the figures involved and the point in the tax year that it happens.

Hi, 
Thanks for the speedy response.
Of course that makes sense. YTD at last pay date was £10,978. However, when my contract ends next week this will be £12,244 YTD. I know other factors will come into play during the tax year, i.e. When I get another job, that will increase my tax liabilities, but I'm more interested in what will be deducted from the pay when it lands in my account in August pay run.
Thanks

housebuyer143

I'm not certain but I don't pay tax but when I get a bonus or any large payment they tax it as though my new salary for the year is going to be that every month, until the next month when they realise it isn't and it starts repaying me the overpaid tax.

It's likely if they do it the same way that they will charge you at higher rate and then you will get it back in your next payslips when you continue to earn much less. 

Can you get your work to spread the payments over more than one month? I'm going through redundancy now and my payroll are pushing my payments over 2 months to avoid me being taxed too much.

molerat

Your total YTD at M5 will be £19211.  This leaves £13969 after your pa subject to tax, 40% starts at £15709 for M5. 

So if the £6967 is your only income for August you will have £1184 tax and £432 NI deducted leaving £5350 in your pocket.

chrisbur

housebuyer143 said:

Can you get your work to spread the payments over more than one month? I'm going through redundancy now and my payroll are pushing my payments over 2 months to avoid me being taxed too much.

OP Do not do this, have the payment as one payment.
Spreading payments will have no affect on the tax paid in the long run, the tax you pay this year will be decided on the total taxable earnings you have in the year it does not matter how it is spread out over the year.
What it would affect is your NI payment as molerat advised on £6966 you will pay £ 432 or thereabouts, if this was paid as two payments of £3483 you would then pay about £292 for each month resulting in NI of £584
You would need it spread out over 4 months to make any saving, not sure the employer would be that obliging.

housebuyer143

chrisbur said:

housebuyer143 said:

Can you get your work to spread the payments over more than one month? I'm going through redundancy now and my payroll are pushing my payments over 2 months to avoid me being taxed too much.

OP Do not do this, have the payment as one payment.
Spreading payments will have no affect on the tax paid in the long run, the tax you pay this year will be decided on the total taxable earnings you have in the year it does not matter how it is spread out over the year.
What it would affect is your NI payment as molerat advised on £6966 you will pay £ 432 or thereabouts, if this was paid as two payments of £3483 you would then pay about £292 for each month resulting in NI of £584
You would need it spread out over 4 months to make any saving, not sure the employer would be that obliging.

Thanks for working it out. I am not a tax payer so I suppose this works for me as I don't end up paying NI which I can't get back and don't end up paying both tax and student loan that I have to wait until next year to claim back.