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TonyTax
TonyTax, Tax Consultant
Category: Tax
Satisfied Customers: 15950
Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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In a situation where payment in lieu of a 12 month notice period

Customer Question

In a situation where payment in lieu of a 12 month notice period is paid in August and attracts tax, most if not all of which is at 40%, is there any opportunity for tax relief bearing in mind that the notice period would have effectively gone into the 2016/17 tax year and therefore that part would have been at a lower rate.
Submitted: 2 years ago.
Category: Tax
Expert:  TonyTax replied 2 years ago.
Hi. I'm afraid not. The point of a payment in lieu of notice is that it is paid earlier than it would normally be, ie in your case the notice would normally be paid over 12 months and you would work through it. If your employment contract gives your employer the right to pay you off instead of you having to work your notice period then the payment will be taxable. If the employment contract does not give the employer the right to pay you off, then the payment should be tax free up to £30,000 assuming there is no separate redundancy payment. Take a look here for confirmation. I hope this clarifies your position but let me know if you have any further questions.
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Customer: replied 2 years ago.
Thanks for your advice.
It does seem a little unjust that anyone who pays tax at 40% and leaving employment in say May would take home more of their settlement than someone leaving in August or September but I guess it's the luck of the draw.
Expert:  TonyTax replied 2 years ago.

The difference is if it is paid in lieu it doesn't have to be worked for. Most people who are on employed are on four weeks notice, some three months so if I was offered 12 months pay for no work, I'd take it and take the tax hit, unless there was a clause which precluded me from working in the same business for 12 months.

One final point. If you don't take another job before the end of the current tax year or even if you do, you may be entitled to a repayment of some of the tax you have paid. After 5 April 2016, call the tax office and ask them to review your tax position for 2015/16. Alternatively, if you don't intend to work before the end of the tax year, you can apply for an in-year tax repayment by completing a form P50 here.