The law has changed in respect of termination and redundancy payments.
From 2012 termination and redundancy payments will be taxable, subject to a cap of £50,000.
From 2012 all payments received in consequence of the termination of employment are taxable, regardless of whether such payments are contractual, statutory or voluntary.
However, the first £50,000 of redundancy payments and other payments for loss of office will be exempt from income tax.
The tax trigger point is the date when the individual is entitled to be paid the termination payment. If an agreement is made in writing before 1 January 2012 and the agreement states that the individual is entitled to be paid after 1 January 2012 then the new tax rules will apply. If it exceeds £50,000 the termination payment will be subject to income tax in the year of assessment 2012 and your employer will deduct your ITIS percentage from the excess.
The £50,000 excess does not apply to payments that are remuneration or deferred pay. This includes bonuses’, holiday pay, payment in lieu of notice, gardening leave, payments while suspended from duties, pensions and other payments of a similar nature. All these payments are liable to income tax. An example is shown below.
|
Types of payment
|
£
|
Tax treatment
|
£
|
|
Compensation for redundancy
|
60,000
|
First £50,000 (max) of termination payment tax free
|
10,000
|
|
Salary
|
5,000
|
Taxable
|
5,000
|
|
Bonus
|
12,000
|
Taxable
|
12,000
|
|
Payment in lieu of notice
|
10,000
|
Taxable
|
10,000
|
|
Holiday pay
|
1,000
|
Taxable
|
1,000
|
|
Total
|
88,000
|
Total subject to tax
|
38,000
|
|
|
|
Employer deducts ITIS eg 16%
|
6,080
|
In the example above, if the redundancy payment was £40,000 then this payment would be tax free, but all the other sums are still taxable in full. This would result in a total subject to tax of £28,000.
Injury, death and disability payments
Any payment made resulting from injury, death or disability is exempt from tax without limit.
Employers must deduct the individuals current effective rate percentage from any redundancy payment or other payment for loss of office or employment in excess of £50,000.