PHI 'Loss Of Office' tax liabilities

The_Big_Bamboo · 12 October 2016 at 2:10PM

Hi,.. 1st post so I hope this is the correct sub-forum.:)

I have been disabled for several years and unable to work;…fortunately I have been receiving Permanent Health Insurance (PHI) through my employers since the date of my disability.

The PHI insurance payments are paid to me through my employers monthly pay-roll;..i.e., the PHI effectively is my only income and I pay tax, Nat. Insurance & pension contributions just as any other employee.

I’m 60 years old and my regular monthly PHI payments will continue until my 65th birthday;

….however, the PHI company have offered me a full and final lump-sum settlement figure as an alternative to ongoing monthly payments.

The lump-sum payment is in 3 parts;

1) Approx 1 months salary in lieu of notice.
2) Approx 1 months salary in lieu of benefits.
3) a ‘Loss of Office’ payment.

I believe the ‘salary in lieu of notice’ & the ‘salary in lieu of benefits’ will be subject to tax and Nat.ins;

…however, can anyone please advise me what my Income Tax and National Insurance liabilities will be on the ‘Loss of Office’ amount if I accept their final lump-sum settlement offer?

The ’Loss of Office’ payment is a considerable amount;.. I’ve had a trawl through HMRC website but I’m none the wiser.

All advice gratefully received.

jamesd · 12 October 2016 at 6:26PM

What does your employment contract say about the loss of office payment? Is it part of the normal employment contract or not? If it is, it'd be taxable as pay. If it isn't it'd be outside that and potentially at least the first 30k tax free. You should ask them to explain the tax treatment agreed with HMRC since some of the guidance says ask HMRC. See for example page 95.

Also ask them if they can make anything that is not a tax free redundancy payment as a pension contribution instead, with half or all of the saved employer NI also added to the pension. You'll need to know how much annual allowance and carry-forward annual allowance you have available since the pension contributions limit without tax charge is what you have available to use.

At least a substantial part as pension can be very attractive because:

1. 25% is available as a tax free lump sum with no NI.
2. the rest is available as taxable income on demand with no NI.

Questions once the applicable tax treatment is known then depend on things like how much income you can generate from the lump sum. A lot, I expect.

The_Big_Bamboo · 13 October 2016 at 10:59AM

jamesd wrote: »

What does your employment contract say about the loss of office payment? Is it part of the normal employment contract or not? If it is, it'd be taxable as pay. If it isn't it'd be outside that and potentially at least the first 30k tax free. You should ask them to explain the tax treatment agreed with HMRC since some of the guidance says ask HMRC. See for example page 95 [/URL].

Also ask them if they can make anything that is not a tax free redundancy payment as a pension contribution instead, with half or all of the saved employer NI also added to the pension. You'll need to know how much annual allowance and carry-forward annual allowance you have available since the pension contributions limit without tax charge is what you have available to use.

At least a substantial part as pension can be very attractive because:

1. 25% is available as a tax free lump sum with no NI.
2. the rest is available as taxable income on demand with no NI.

Questions once the applicable tax treatment is known then depend on things like how much income you can generate from the lump sum. A lot, I expect.

The HMRC link you provided has answered my specific question;…it seems that my employers should contact HMRC to basically double-check that the payment meets the HMRC ‘disability, injury or ill health’ criteria as it is over £30k.

I don’t foresee any issues so it appears that the FULL amount of my ‘Loss of Office’ lump-sum will be completely exempt from Tax & Nat.Ins.

Page 94 section 5 :
5. Lump sums to compensate for loss of employment through disability, injury or ill health which prevents the employee carrying out the duties of the employment. Where such a payment is over £30,000, you may wish to agree with us before you pay the whole amount tax-free.

Thanks so much for your very helpful reply;..it’s greatly appreciated.

PHI 'Loss Of Office' tax liabilities

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