Query about tax and NI paid on bonus/compensation

[NameChangeryPerson]

Have namechanged as we don't want anyone to know we're received this money. My DH works in the public sector. His hours and shift allowance are being cut (12% shift allowance) so obviously his wages are going to be reduced by quite a bit. He's in a union, the union fought his employers and won the employees compensation.

The compensation they are going to be paid is £2500, on the condition that the employee doesn't leave in the next 2 years otherwise they will have to pay the money back. DH is receiving this compensation in his next monthly wages. He normally earns around £1054 a month after tax and NI have been paid. So he usually pays around £200 ish a month in both tax and NI. Because he received the compensation in his wages they have taxed it and he's paid NI on it. So he's £650 in income tax this month (when he normally pays around £135 a month tax) and £350 in NI this month (when he normally pays around £70 a month in NI). Is this right? Is the compensation classed as taxable income? He's basically lost around £900 of his compensation to tax and NI.

Also he has an AEO on his wages due to unpaid council tax from when he was younger (I know, I know). This is a percentage of his wages so normally around £200 is taken from his monthly wages, this month because the compensation is in with his wages they took £850! Is this right also? I'm guessing it is? And there's probably nothing we can do about it?

So out of this £2500 compensation he's received we've ended up receiving roughly about £900. Is there anything we can do to get it back? Or is right that he was taxed and NI that much and the percentage of AEO that was taken is right too?

This does appear as though it is being called compensation but being treated as a bonus or additional income. I know when I get my annual bonus I see very little of it because most of it disappears in tax and NI. Compensation from a personal injury insurance claim, for example, wouldn't be taxed. If the union has won the extra payment and knew it was going to be treated as taxable income they should probably have given members that information in advance.

That's right I am afraid - redundancy payments are not subject to tax and NI (up to a limit), but as he still has a job with the same employer this is not redundancy. If he earned the £2,500 through overtime he would have to pay tax and NI of course (and the AEO would apply).

Thanks for the replies. :flowers:

DH phoned the tax office. They said it was right (after much tooing and froing) and the rest of the year will be adjusted.

The thing I'm now worried about is if they class this extra £2500 as earned income it will effect our tax credit claim next year. We rely heavily on tax credits in order to live, I've just done the online tax credit calculator with the added compensation on to his income and it reduces our tax credits quite significantly. We've now said if it means we're going to be short for a whole year because of it we don't want the bloody compensation (seen as we're not seeing most of it now anyway). Should I ring the tax credit helpline to ask them if it will effect next years claim? Or is CAB my best bet? I'm also wondering if they could actually stop the compensation payment now anyway as it may be to late. (He gets paid on Friday). Jeez it's more trouble than it's bloody worth.

Yes it will affect your tax credits, but then your DH is going to have his pay reduced anyway, so it may even out.

I left a public sector job because i was pre-surplus and relocated (at my own expense) for another job. The old Dept paid me excess fares as a lump sum so we lost our tax credits completely :(