Reader Question:
Are redundancy payments taxed as a one off payment or are they added to what has been earned during the last financial year?
Example: Earnings for the year until redundancy £25,000. Redundancy payment £40,000. Would I expect to pay tax on £10,000 of redundancy money or would that £10,000 be added to the £25,000 earned that year?
My response:
As you allude to Income tax is only payable on statutory or contractual redundancy payments over £30,000.
So, to use your example, the £10,000 would be added to your income for the tax year so far (£25,000) and you would be liable for income tax at your highest marginal rate (which in this instance will be 20%). You do not have to pay National Insurance on this type of redundancy payment. (Payments in lieu of notice are subject to income tax and National Insurance)
Assuming that the payment is made before your employment has been terminated then the tax due will be automatically deducted via PAYE (Pay As You Earn). When you then start your next employment and hand over your P45 they will ensure you pay the correct amount of tax on your earnings for the remainder of the tax year.
However, if the redundancy payment is received after you have left employment (and after receiving your P45) then you will be taxed as if they are earnings accrued in one month (you will be given a new tax code for this payment which does not take account of any personal allowances). The tax man will assume this situation will continue so will artificially inflate your projected earnings for the year. Which will mean that you will pay more tax (likely to be too much). Annoyingly you will then need to go about claiming this overpayment of tax back from the tax man which is another headache you probably could do without.
Make sure you discuss your redundancy with your employer and their accountant to ensure any payment is taxed correctly.
I hope that helps
Best Wishes
Damien
Money to the Masses
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