Reader Question: How much tax will I pay on my redundancy payment?

Reader Question:

Hi, I am being made redundant from the 30/04/2012 my redundancy payment totals £80,314 of course £30,000 is tax free of the remaining £50,314 how is the tax worked out and how much will I get?

Thanks

Nick

My response:

As you state the first £30,000 will be free from taxation, while the remaining £50,314 will be liable to income tax at your marginal rate under PAYE, but not National Insurance Contributions.

Obviously your overall income tax bill for the 2012/13 tax year will depend on your other earnings throughout the year.

But assuming you didn't earn anything else for the rest of the tax year, and you got your full personal income tax allowance, your overall tax bill would likely be around £10,000. (i.e. £6,874 at the 20% income tax rate and £3,135 at the 40% income tax rate).

But the amount you actually receive when you leave will depend on how you receive it. If you are paid your redundancy when your p45 is issued then your payment will be taxed under PAYE, presumably correctly based on your earnings for the tax year to date.

However, if it is paid after you receive your P45 then it is likely that your redundancy will be taxed presuming the to be earnings to relate to one month's pay (this is a result of rules changes that came into effect last year). The upshot would be that you would pay more tax initially which you would then need to reclaim.

Obviously any overpayment tax (via either route) can be rectified but you might want to talk to your payroll department to ensure your tax code is correct and avoid any unnecessary overpayments.

Finally I suggest that you download this excellent FREE guide on how to minimise your tax bill.

 

I hope that helps.

Damien

 

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