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PAYE on redundancy payments

PAYE on redundancy payments

Apparently, HMRC want to change the taxation of redundancy payments from 6th April, and tax the excess over £30,000 using code OT. This would result in HMRC getting lots of interest free loans, and the ex-employees would have the hassle of claiming it back after the year end. So far, I've seen nothing on it except Money Box 19th February. It's the last item, about 21 minutes in.

Is this being resisted by the profession? Does anyone know what's going on?


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04th Mar 2011 16:39

HMRC Employer Update 39...

...which you can see here. It's taken me a while to find it, so I'm not surprised it's not been more widely noted.

The changes to CWG2 (2011) (PDF link) are on page 103 (compare page 99 of CWG2 (2010))

I suppose the only effect of the change is to more accurately reflect the higher rate for these (ex-)employees. This should still only apply to taxable income, and should not include redundancy pay and/or anything within the £30,000 limit.

I've heard nothing on this - but then I'm not in payroll...


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04th Mar 2011 18:05


Many thanks for that. This seems to discriminate against people who get the payoff at or before the issue of the P45. At least, if it's in the P45, the employee gets some more rapid tax relief if he gets a new job, and the PAYE YTD is therefore too large, relatively speaking.



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06th Mar 2011 11:29

Am I missing the point?

The only change from 6th April 2011 is to tax people with redundancy payments in excess of £30,000, which are paid after issuing the P45, on code 0T rather than code BR.  If the excess is less than £35,000 (a redundancy payment up to £65,000), they will still be taxed on it at the basic rate of 20%, so there is no change - these people would be paying less tax at the time than if they had the redundancy payment included before their P45, which would be taxed probably entirely at 40%.  They benefit from deferring any additional tax on the excess redundancy payment until 31st January following the end of the tax year.

If the excess is more than £35,000, they will be taxed at 20% on the first £35,000 of the excess and at 40% on the excess over £35,000 up to £150,000 (a redundancy payment of £180,000) at 40%.  It will still be less tax than if it had been included before their P45, when it would all be taxed at 40%, rather than the first £35,000 being taxed at 20%.

Making taxable payments after the P45 has been issued has always been tax advantageous.  That is why many (ex-)employers do it that way.  After 6th April 2011, it will be slightly less tax advantageous for those receiving redundancy payments in excess of £65,000.  Forgive me, but my heart does not bleed for them.

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06th Mar 2011 21:16

That's not quite how it's set up

The new Guide says (at the bottom of page 103)

– operate PAYE by using Code 0T (on a week 1/month 1 basis)

No allowances, and a M1 basis, means that an annual salary of £240,000 is assumed, which is taxed at 50%. It is not the excess over £35,000 which is taxed at 50%, but the whole lot.


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07th Mar 2011 09:56

Probably more accurate in most cases

As far as I can see, a taxable payment after 6 April 2011 post-P45 on 0T W1/M1 would have basic rate on the first £673 (W1) / £2,917 (M1),  higher rate on the next £2,212 (W1) / £9,583 (M1), and additional rate thereafter deducted at source. This, as Euan points out, is in HMRC's eyes preferable to the current situation whereby all the amount would have only basic rate tax withheld.

There is no suggestion anywhere that statutory and/or non-taxable amounts received would have tax deducted.

As ever, there will be discrepancies between the amount deducted and the amount due, but it will be less likely that large amounts will be due to HMRC under SA.

As an example, consider an individual with £50,000 on his P45 correctly taxed (paid monthly), and an ex-gratia payment of £80,000 post P45.

The first £30,000 of the ex-gratia payment is non-taxable. The remainder will have tax deducted of ( 2,917 @ 20% ) + ( 9,583 @ 40% ) + ( 37,500 @ 50% ) = £23,167.

The actual tax due is 50,000 @ 40% = £20,000, thus a refund of £3,167 is due to the TP.

Under current rules, 50,000 @ 20% = £10,000 would be deducted, and the TP would owe £10,000, plus payments on account.


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07th Mar 2011 10:20


Thank you, TaxManDan.

The point I had missed was that 0T was to be operated on a Month 1 basis.

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10th Mar 2011 11:43

If time permits...

... the employer can use this procedure instead.: http://www.hmrc.gov.uk/manuals/pommanual/PAYE74010.htm.

Alternatively, I believe that it is possible to make "in year" repayment claims if you have been excessively taxed under PAYE.  Obviously, the situation will resolve itself once the individual is reemployed.

The idea is, I think, to circumvent the "problem" of termination payments being deliberately made after the P45.  You will now generally be in a better position to make the payment before the P45.

It shoud be noted though that, despite HMRC guidance, the PAYE Regulations have yet to be amended for this.

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By Johnque
12th Mar 2011 10:10

Bleeding hearts
I hope you are never faced with redundancy after you heart bleeds comment. I will receive a fair sized payment when I am made redundant soon and could be caught by this new situation meaning a delay before I can receive all the money I'm entitled to. Yes it seems like a lot of money but its money to tide me over between jobs and will need to be used to relocate to a more expensive area , I may be unable to sell my current home, and also need to unsettle my two children who are used to a stable income lifestyle. The company is shutting European operations due to poor management decisions and not due to any fault of the impacted workers. So just think about others before making stupid comments, money is relative, if you earn less you have problems but there are also problems when you earn more and it's not right to judge or make flippant comments.

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12th Mar 2011 11:19


Actually, I was made redundant in not dissimilar circumstances to your own.

I would point out that taking the tax on redundancy payments at the time of payment is entirely fair and reasonable.  That is the basis of PAYE.  The problem only arises if you are out of work for some time and cannot claim a refund of some of the tax as you become entitled to more of the tax-free personal allowance as the months go by.

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By Toucan
17th Mar 2011 14:53

Not just slightly worse off...

"The problem only arises if you are out of work for some time"...

or you are forced through redundancy to leave the country.  

The earlier statement that there is only a minor discrepancy if your payment is over £65k does not ring true if you get your sums right. Me and my wife are looking at a combined £19.5K overpayment, which I hope you admit is significant. We're due to be made redundant in the new tax year and we are going overseas. As a consequence we will not get it back through future PAYE.

Does anyone know how we can apply for early "in year" tax rebates? or how we can get the PAYE assessment done as suggested in one of the previous answers. 

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17th Mar 2011 15:16

Toucan, in your specific circumstances,

You need to write to your Tax Office immediately providing your P45s and evidence of any post P45 tax deductions, explaining the circumstances and requesting repayment.  I'd include a form P50 as well, so that if the tax office require it, it doesn't cause delay.

See http://www.hmrc.gov.uk/incometax/stop-work-refund.htm for general guidance.

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By mikerv
15th Apr 2011 21:12

..and am I also missing the point?

Looking at the guidance on Page 103 of CWG2 surely the application of week 1/month 1 (code 0T) only occurs if the redundancy payment occurs after the employee leaves the company (and for practical purposes after the P45 is issued).

For employees receiving a redundancy payment before or at the point of leaving (and where by implication that payment is included in the P45) then the guidance indicates that the payment is taxed using PAYE in the normal way.

Am I missing something here? And it's particularly relevant as I will be leaving with a redundancy package on 28th April.

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16th Apr 2011 18:37

The point is ...

An employee being made redundant might not get another job for quite some time. If the redundancy payment comes after the P45, the changes mean that the employee is taxed at a high rate (most likely 50%) on the whole payment above £30,000, and he/she might need that money. If there is no scope for reclaiming the tax until after the end of the tax year, that bears heavily on people who are made redundant early in the tax year.

There appears to be no mechanism to ease the problem.


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By mikerv
16th Apr 2011 19:43

to ease the problem...

Encourage employers to make redundancy payments before the P45 is issued.

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By 2ks
16th May 2011 19:53

What should I get

I feel I have fallen foul of this.

I was made redundant on 30th April and receieved Redundacy payment on 16/5/11 after P45.

My redundancy was £51721.  In simple terms how much should I pay in tax as I have not had any official from anywhere and being government its very tricky to get anything in writing for some unknown reason


I ended up with a payment of £42664 which looks like over £9K in tax which seems high.

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17th May 2011 13:54

Looks right

The tax payable on £21,721 (the total termination payment of £51,721 less the £30,000 exemption) under PAYE code 0T Month 1 is £9,027.16.

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By 2ks
17th May 2011 16:07

Thanks -

Thanks for that.  They are legit Burglars then.

God only knows what will happen with my CILON and O/S leave payments now that I have already had P45.  I guess I can expect another OT code

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By blenky
24th May 2011 18:05

Have I fallen foul of this?


I have been made redundant and my employment terminates on 1st June.  Redundancy of £70434 was paid in my final salary which I recieved on 20th May.

My final paypacket therefore included pay and overtime so my total final pay was £73769.41 of which 43769.41 is taxable.

I taxed to the value of £18989.  Is that correc? I thought I would be charged basic rate on the £40434.




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