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taxadvisor.uk
taxadvisor.uk, Chartered Certified Accountant
Category: Tax
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Experience:  FCCA - over 35 years experience as a qualified accountant (UK based Practitioner)
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I am thinking about applying reduncdancy in

Resolved Question:

I am thinking about applying for Voluntary reduncdancy in acouple of years time and am trying to work out how much tax I will pay. My part time salary at the moment is £35,000 and I am considering increasing my hours which will take me into 40% tax bracket. My likeley redundany payment in a couple of years time will be in the region of £100,000. I understand that the first £30,000 is tax free. If i was to increase my hours to go into the 40% tax bracket would anything over £30,000 be taxed at 40%? If I stayed working less hours and stayed under the 40%tax threshold would the reduncady payment of £100,000 be taxed at 20% over £30,000?
Submitted: 2 years ago.
Category: Tax
Expert:  taxadvisor.uk replied 2 years ago.
Hello and welcome to the site. Thank you for your question.

Severance package at leaving the employment with the exception of first £30,000 would normally be taxed as remuneration under PAYE at your marginal rate of tax.

If you were to receive £100,000 then the first £30,000 would be tax free and the rest would be taxed at the marginal rate. This figure will push you into higher rate tax band and you will pay tax at 40% and not 20%

You may wish to read this article dealing with taxation of termination payments here
http://www.out-law.com/topics/tax/employment-tax/taxation-of-termination-payments/


I hope this is helpful and answers your question.

If you have any other questions, please ask me before you rate my service – I’ll be happy to respond.

Customer: replied 2 years ago.

Please could you give me some more detail. Firstly please can you confirm if I would pay 40% on the remaining £70,000 of the redundancy payment or whether I get my normal single person tax allowance and then the tax is graduated 20% up to 42,000 (or whatever the threshold is). Which would be 20% up to £72,000, then 40% of £22,000. If you could send me a breakdown of the figures of the tax that i would actually have to pay that would really help to undersatnd using an example of £100,000 redundancy payment.

Please could you also tell me as I dont understand, if I was now to earn £50,000 a year, which takes me into the 40% tax bracket. Would I get taxed at 20% up to £42,000, then 40% on the remaining £8,000? Or would I be taxed at 40% on all £50,000 above my tax allowance?

My original question was if I was to stay a 20% tax payer (work same hours as now stay on £35,000) and then took redundancy of £100,000 would I then be paying 20% on the remaining £70,000 which is not tax free or 40% tax on the £70,000 which obvioulsy makes a big difference in the actual money I recieve from the redundancy payment .

Expert:  taxadvisor.uk replied 2 years ago.

Lynn, thank you for your reply.

My answer to points raised by you

[q1]
Please could you give me some more detail. Firstly please can you confirm if I would pay 40% on the remaining £70,000 of the redundancy payment or whether I get my normal single person tax allowance and then the tax is graduated 20% up to 42,000 (or whatever the threshold is). Which would be 20% up to £72,000, then 40% of £22,000. If you could send me a breakdown of the figures of the tax that i would actually have to pay that would really help to undersatnd using an example of £100,000 redundancy payment.

[a1]
First £30,000 of redundancy pay would be tax free and the remaining £70,000 would be added to your other income in the tax year.
Example for illustration purposes only: Assume
Other income in the tax year in question is £35,000
Taxable element of redundancy package is £70,000
Personal allowance is £12,000
Personal allowance reduced if net income exceeds £110,000
Threshold for basic rate tax is £40,000

Tax calculations-
Total income (35,000+70,000)= £105,000
Personal allowance= £12,000
Taxable income (105,000-12,000)= £93,000
Income tax payable
£40,000 @ 20%= 8,000
£53,000 @ 40%= 21,200
Total tax payable (8,000+21,200)= £29,200

[q2]

Please could you also tell me as I dont understand, if I was now to earn £50,000 a year, which takes me into the 40% tax bracket. Would I get taxed at 20% up to £42,000, then 40% on the remaining £8,000? Or would I be taxed at 40% on all £50,000 above my tax allowance?

[a2]

Taking my example of tax allowances and threshold

Salary= £50,000

Personal allowance= £12,000

Taxable income (50,000-12,000)= £38,000

As this is below the threshold for higher rate tax your taxable income of £38,000 would be taxed at 20%

Tax payable £38,000 @ 20%= £7,600

Say if your salary was £55,000 then your

taxable income becomes (55,000-12,000) £43,000 and your tax payable would be

£40,000 @ 20%= 8,000
£3,000 @ 40%= 1,200
Total tax payable (8,000+1,200)= £9,200

[q3]

My original question was if I was to stay a 20% tax payer (work same hours as now stay on £35,000) and then took redundancy of £100,000 would I then be paying 20% on the remaining £70,000 which is not tax free or 40% tax on the £70,000 which obvioulsy makes a big difference in the actual money I recieve from the redundancy payment .

[a3]

see [a1] for detailed calculations You would be pay 40% on the bulk of it.

I hope this is helpful and answers your question.

If you have any other questions, please ask me before you rate my service – I’ll be happy to respond.

taxadvisor.uk and other Tax Specialists are ready to help you
Expert:  taxadvisor.uk replied 2 years ago.

Hello Lynn

I notice you have viewed my answer to your question about tax payable on redundancy pay (JACUSTOMER-cgyvbewe- Last Viewed on 05/02/2015 at 18:30).

Just checking to see if you have any issues relating to your question that I may not have addressed.Please let me know if I can be of further assistance.

If you are happy and there are no more issues I will appreciate if you would kindly rate/accept the service I provided to ensure I get credited for it.

Expert:  taxadvisor.uk replied 2 years ago.
I thank you for accepting my answer.

Your reward of a bonus is greatly appreciated.

Best wishes.