Redundancy - £30k Tax Free Question

bcfcjwb1

Hi,

Probably a question for the tax experts out there...

I took voluntary redundancy from my previous employer in March 2007. Due to the size of my redundancy payment and the financial situation of the company, the payment is being paid over 12 months - 2 payments to go!

The result of the above is that my redundancy payment spans 2 tax years - 2006/07 and 2007/08.

My question is can I pro-rate the £30k tax free amount over 12 months? This would mean a tax free amount of £2.5k in 2006/07 and in £27.5k in 2007/08. The reason that I would like to do this is that it would save me about £1k in tax.

I have asked the tax office about this and did not receive a satisfactory answer to my question, despite talking to a tax technician. I kept being told that this was a highly unusual scenario and that they couldn't give me tax advice.

Thanks in advance.

LittleVoice

Personally I don't think you could spread it out, deferring part to the following year.

This is simply on the logic that tax is due when income is received and therefore the non-taxed amount should also receive that treatment as it is received. Given that you might not actually receive the second tranche (eg company goes into liquidation with insufficient funds to pay your level of creditor), then the first payment should be assumed to be the only payment when that tax year is assessed.

But, of course, that is just my view ....

Cook_County

HMRCs own Employment Income Manual says the following (it is surprising that HMRC could not find it themselves when you called):

13520. Section 401 ITEPA 2003. £30,000 threshold: Payments and benefits received on or after 6 April 1998. Section 404(5) ITEPA 2003.

For payments and benefits received on or after 6 April 1998, the rule is that the £30,000 threshold is applied in the following order:

• ∙ first, against cash benefits as they are received in the year and
• ∙ second, against the aggregate of non-cash benefits at the end of the year (this can be relevant to an employer considering whether the PAYE Regulations apply to a payment).

See example EIM 13955.

13955. Example: Section 401 ITEPA 2003. £30,000 threshold: Order of set-off: Receipts on or after 6 April 1998

Section 404(5) ITEPA 2003.
A termination settlement provides for:

• ∙ £36,000 paid in 3 equal annual instalments from 1 January 2004 plus
• ∙ use of a car. The cash equivalent of this benefit is calculated as £2,000 for 2003/04, £7,000 for 2004/05 and £7,250 for 2005/06.

The total is £52,250 (£36,000 + £2,000 + £7,000 + £7,250), against which only one £30,000 threshold is available. Following EIM 13520 :

• ∙ for 2003/04, the total provision for tax purposes is £14,000 (£12,000 cash plus £2,000 benefit cash equivalent). This is all covered by £14,000 of the threshold, leaving £16,000 balance of threshold to carry forward.
• ∙ for 2004/05, the total provision for tax purposes is £19,000 (£12,000 cash plus £7,000 benefit cash equivalent). This is more than the available threshold of £16,000 so the latter must be set off in the order explained in EIM13520. So it is first set off against the payment of £12,000 made on 1 January 2005, leaving £4,000. That £4,000 is then set off against the total cash equivalents at 5 April 2005 of £7,000. So £3,000 is charged to tax.
• ∙ for 2005/06, there is no threshold brought forward so the £12,000 cash payment and the £7,250 benefit cash equivalent are chargeable in full under Section 401 ITEPA 2003.

bcfcjwb1

Thanks Cook_County for taking the trouble to find this.

In my case, I think it means that I can't pro rate the allowance at £2.5k per month.

Lets say (for argument's sake) that I received £72k @ £6k per month...

My reading of the guidance suggests that the £6k received in March 2007 should all be treated as part of the £30k allowance in 2006/07, with no tax being payable on this. The remaining £24k allowance would then be used in 2007/08, with no tax being payable on this, and the balance of £42k being fully taxable.

I was hoping to max out my 22% taxable income in 2006/07 by paying tax on £3.5k (£6k less £2.5k), but it doesn't look like I can do this.

It's a shame if I'm reading this right, as I will lose ~£1k - c'est la vie!

What do you think?

Cook_County

I think you should also read the law because HMRCs interpretation is often not necessarily correct. However, in this case, Section 404(4) appears to support HMRCs contention:

404 How the £30,000 threshold applies

(1) For the purpose of the £30,000 threshold in section 403(4) and (5), the payments and other benefits provided in respect of an employee or former employee which are to be aggregated are those provided—
(a) in respect of the same employment,
(b) in respect of different employments with the same employer, and
(c) in respect of employments with employers who are associated.



(2) For this purpose employers are “associated” if on a termination or change date—
(a) one of them is under the control of the other, or
(b) one of them is under the control of a third person who on that termination or change date or another such date controls or is under the control of the other.



(3) In subsection (2)—
(a) references to an employer, or to a person controlling or controlled by an employer, include the successors of the employer or person, and
(b) “termination or change date” means a date on which a termination or change occurs in connection with which a payment or other benefit to which this Chapter applies is received in respect of the employee or former employee.



(4) If payments and other benefits are received in different tax years, the £30,000 is set against the amount of payments and other benefits received in earlier years before those received in later years.
(5) If more than one payment or other benefit is received in a tax year in which the threshold is exceeded—
(a) the £30,000 (or the balance of it) is set against the amounts of cash benefits as they are received, and
(b) any balance at the end of the year is set against the aggregate amount of non-cash benefits received in the year.

bcfcjwb1

Despite trawling around the internet and talking to an accountant, I have been unable to get any more information on this. It looks like the £30k provision can not be pro rated at £2.5k per month.

Any other views, or points of reference?