Redundancy package error - been taxed on the tax free £30k

[Argumentsake]

DH has received an enhanced redundancy package. It looks like his company have included the £30k tax free amount in the overall lump sum and have calculated tax and NI on it.

How easy is it for payroll to rectify? Can they? Or will DH have to be reimbursed by HMRC?

It's only the redundancy payment that's tax free. Payment in lieu of notice is taxed as usual. They are often paid in the same payroll.

Agree over above point
but assuming that it’s the case that taxes are charged on the 30k as well in error.
if paid this tax year then they can correct next payroll
if last tax year you will need to reclaim from hmrc

Yes understand fbat the other elements are all taxable; PILON, bonus, holiday and the enhanced redundancy package itself. But even though they have itemised the £30k as tax free, they have included it in the figure to be taxed and NI. Was paid in this tax year.

Payroll should rectify it. I doubt HMRC will refund as his payroll dept have incorrectly classified it for tax purposes.

PILON came through in my normal salary pay run and was taxed. The redundancy payment came through in a separate transaction and wasn't taxed. Is there a pay slip?

Mine all came through on the same one.

If it’s been paid in this tax year it’s easy for them to rectify. He just needs to contact payroll and explain the error. He may need to wait until the next par run for it to be rectified, or they may do a special one for this.
He needs to contact them quickly because it’s tricky to reinstate a staff member in some payroll systems once they’ve been marked as left.

Yes there is a payslip. Everything included in one. We can see that it’s been added to the total and tax has been deducted on the whole.

He’s hoping to speak to them today. Are there any instances where an individual isn’t eligible for the tax free element?

Not if it's truly a redundancy payment, no. The rules are that £30k is tax free.

As long as it is a redundancy payment and is not contractual, then the first £30,000 should be tax free.

when I was made redundant my former employer deducted a pension contribution from my PILON, whilst that was an option, it was not agreed and I argued for it back. They corrected their error, refunding the pension deduction, which also had a tax implication.

So DH had an email from payroll and they say they did not include the £30,000 tax free.

They sent him the tax breakdown and I don’t understand how they have arrived at the total tax to be paid. They have included the thresholds but don’t appear to have used them correctly. They have taxed almost the full amount at 45% when it should only be the amount above the higher threshold. They have only taxed £6000 at 20% when it should be the first £37,000 and only £14,500 at 40% when it should be the majority between £37,000 up to £125,000.

Do the usual tax thresholds apply when being paid a lump sum in one go rather than an annual salary? I have plugged all the figures in to the UK Gov website and they match with my calculations. But wondering if I’m missing something obvious? It is a big company and I’d be shocked if their payroll had got it so wrong but it’s a lot of money to be missing if they are wrong!

We're only in month 2 of the tax year, so the allowances and rate bands will be apportioned accordingly. If your DH doesn't start work elsewhere before the end of the tax year then there should be a repayment due. It used to be possible to get in-year repayments in some cases but I don't know if this is still the case.

Have a look at the information from the Low Incomes Tax Reform Group

https://www.litrg.org.uk/working/employment/leaving-job/redundancy

I haven't checked the figures but it'll likely be because each month the payroll will only allow 1/12th of the tax bands. This is done on a cumulative basis so for May payroll, 2/12ths of the the personal allowance (if eligible) and 20% band is applied to the taxable income for the year to date (ie April and May income), and then 2/12ths of the 40% band, before the remaining is taxed at 45%. Then the tax paid for April is deducted to find the amount due for May.

This is correct from a payroll position and so won't match the annual HMRC calculators. It results in a very skewed amount of PAYE paid for people in your husband's position as it's on the assumption that similar income will be earned for the rest of the year. Your husband should provide his p45 to the next employer (hopefully he'll have one soon!) and that should then ensure that it all 'comes out in the wash' as they should take into account the over withholdings for May.

Not ideal unfortunately!

Agree with this assessment
Work in HR and this is a common issue with April redundancy leavers

Why haven't they made the first £30k tax free? Is it not a redundancy payment?

This looks like the case. The figures match when I calculate at 2/12’s and then the rest at 45%.

So does this mean that he will get a rebate at some point if he doesn’t go straight in to another job?

Email them back and ask for it to be escalated and checked again, and for a more detailed summary of how it was calculated.

It would appear a mistake has not been made, from their response, (and without you giving more details it's hard for us to comment) but ask again, to be sure.

Yes, but if he's not receiving any monthly pay through PAYE then it might be an end of tx year thing. I would suggest he calls HMRC to ask if there is a way of accessing the tax refunds sooner if he isn't going to be earning for the rest of the year.

Is he going to be claiming any benefits ? They would refund his tax on a month by month basis.

I was over-taxed due to pilon etc mid year but had to claim back via tax return at end of year. If he gets a new job or claims job seekers allowance he will recoup some of the tax as he will start getting some of his income tax free, but he may still need to do a tax return to get the full rebate depending on how much income he gets this tax year. Redundancy pay up to £30k should be tax free, so definitely worth triple checking. He can also reduce his tax by paying some of the payout into his pension if he can afford to.

If he gets a new job at some point during this year then it will be refunded from payroll at the new job.

If he doesn’t work between now and April he will be able to apply for a refund.

If he wants to access the money sooner he can call hmrc and see if they’ll pay a rebate during the year. This is discretionary so he’ll need to be prepared to explain circumstances etc over the phone.

It’s a common issue as a PP has said. Some payroll software isn’t capable of separating out the payments on the pay slip, but will still treat the 30k as tax free.

So he will be taxed at a higher rate than usual, but it should right itself with his next tax code, and/or a refund at the end of the tax year!

"they say they did NOT include the £30k tax free". Sorry. That needs clarifying. How can they process it NOT tax free? The whole point is that it's supposed to be tax and ni free.