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Sam
Sam, Accountant
Category: Tax
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I am at risk of redundancy. I am a higher rate taxpayer. The

Resolved Question:

I am at risk of redundancy. I am a higher rate taxpayer. The proposed agreement states I will receive 3 months pay "in lieu of the Employee’s three month notice period to be paid" which would be paid in the same pay cycle along with a compensation payment on top of that. I know a limit of £30,000 applies however. Would the total amount be taxable at 40% - if I were still employed of course I would only be taxed on the amount applicable above the threshold each month
Submitted: 11 months ago.
Category: Tax
Expert:  Sam replied 11 months ago.

HI

Thanks for your question - I am Sam and I am one of the UK tax experts here on Just Answer.

Pay is Lieu is always liable to tax as its paid in view of the fact the notice period will not be served out. But up to £30,000 compensation due to loss of office can be paid tax free.

If this payment (the taxable element - so pay in lieu, and anything over the £30K limit and any holiday pay or owed salary. commission bonuses etc) sees that one payment breach the higher rates for that month - then the higher rate of tax is charged. However IF you start a new job and the total salaries and this leaving payment sees you otherwise having remained a 20% taxpayer, then some of the higher rate tax is repaid back each month through the new salary.

Or if after 4 weeks you are not yet re employed or claiming benefits you can make a tax refund claim from HMRC - or if you claim benefits (Job seekers allowance would be due for up to 6 months due to sufficient National Insurance contribution having been paid) then once your claim ceases the Job Centre recalculate your tax position and refund appropriately.

Or if by year end there would be reason to see that some 40% tax (or 45% f you exceed £150,000 for the year) then by one way or another the over deducted tax will still be refunded.

But it will be the compensation payment that would appear to make the main difference here (as the pay would have been earned had you remained in employment for those 3 months, and as long as you dont get further employment until after those 3 months, seeing an excess of £43,000 for the year - all will work out right)

Do let me know if I can assist further

Thanks

Sam

Customer: replied 11 months ago.
Thanks Sam, sorry to have to ask more as it looks like a good answer.
It may help if I give the actual (rounded) figures. My gross salary per year is £50737.
I take home after deductions (inc my pension contribution) £2983 per month.
If I am then paid £12684 as 3 months PILON and another £41116 as a Compensation payment, what will I actually take home? I would like to think I would be employed before the end of the year at a similar salary, but who knows in this economy.
Thanks
Customer: replied 11 months ago.
The compensation payment is an ex-gratia payment
Expert:  Sam replied 11 months ago.

Hi

Thanks for your response and furtehr question

As per Just Answer policy you really should paying for additional services for this calculation to be made . But as this your first time on Just Answer, I will answer within the payment you made already.

Can you advsie what date you will cease employment ? And I can advsie the position as if you were nOT to take up furtehr employment before 05/04/2017

Thanks

Sam

Customer: replied 11 months ago.
Thank you kindly Sam. My proposed leave date is the 30th September 2016One final question relating to the service though - can I choose people to answer if they have answered before and make sure they get the fee ie yourself?
Expert:  Sam replied 11 months ago.

HI

Then I can advsie that

Gross salary from 06/04/2016 to 30/09/2016 will be £25368

Plus pay in lieu £12684

Plus taxable element of compensation £11116

Total income £49168

So without further employment the first £11,000 tax free - then the next £32000 at 20% = £6400 and the reminder at 40% (£6168 x 40%= £2467.20)

So annual tax would be £8867.20

But in 30/09/2016 you will pay 40% of the pay in lieu and the taxable element of the compensation - so 40% x £9520 so if you go onto further employment just hand your P45 and each payday will see a refund back to you but as you are to be paid in lieu then it will not be until 31/12/2016 ( when that 3 month period is complete) that if you still have no work that you can claim any benefits (and then the Job centre will refund overpaid tax (for Sept Oct Nov and Dec) to you

And if you do not claim benefits and have no work 4 weeks after 3112/2016 then claim a part tax refund from HMRC on form P50 - link here for that form https://www.gov.uk/government/publications/income-tax-claiming-tax-back-when-you-have-stopped-working-p50

You will make an unemployment repayment and keep doing this every 3 weeks until sucjhtime employment resumes.

But one way to full mitigate some of the 40% tax is to consider paying some of the pay in lieu or taxable element of the compensation into the pension scheme held with the employer - (at least £6168 to offset the whole of the annual 40% that we know will arise)

But you will need to ask the pension provider is you can make an additional voluntary contribution to the plan and that this keeps you within the annual amount permissible, then at year end make sure you complete self assessment tax return to claim back these additional relief on contributions which in essence £6168 x 20% = £1233.60 (as you will get the additional 20% relief against the contribution) this will then mean you get refunds for the over charged 40% position, and then still get a refund to mitigate the small 40% charge remaining -

Of course this is dependent on the fact that you can afford to have this go into the pension rather than be money in the bank!

If you have any further questions - with this or in the future you can always start your question with asking for me (Sam) and if any of the other experts start to answer, you can just ask them you would rather wait for me (or whichever expert you need!)

But if you have all you need then it would be very much appreciated if you could rate me for the level of service I provided (or click accept)

if you have any follow up questions on this resposne, I shall responde in the morning as off to bed now!

Thanks

Sam

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