Taxation of redundancy payments

[timross101]

This is a question about taxation of redundancy ‘damages’ payments in excess of the £30,000 ‘tax free allowance’ (The damages are for earnings that should have been paid during the notice period which was not worked owing to the company going into administration and employees being dismissed immediately).

The RPO and the company administrators have made payments with ‘notional tax’ at 20% deducted. Real tax has then been deducted at the higher rate (40%) from the net sum after notional tax. I understand why notional tax is deducted but the above approach results in double taxation.

For example.
If the ‘gross’ damages are £20000, then the damages after notional tax are £16000.
Deduction of tax at 40% ( £6400 ) has been taken from this, so the resulting net figure is £9600.
Had 40% tax been applied to the original £20000 ‘gross damages’ the resulting net figure would be £12000.

Is the correct procedure being followed ( which results in an effective tax rate of 52% ) or is there provision in ones tax return to ensure that tax is paid at the 40% on the original ‘gross damages’.

P.S. I’ve simplified things a bit – the actual tax rate used for deductions is complicated, but close to 40%.

[darthblingbling]

Would probably be better to see the full calculations, surprised to see that real tax has been taken. Normally the RPO pays you net of notional tax.

[timross101]

In case I didn't make it clear this concerns payments by the insolvency administrator. The RPO payments only had notional tax deducted and were well below the 30k limit. It's the additional payments by the administrator ( for the difference between RPO compensation and actual salary ) that go above £30k and are then being taxed.

The administrator has taken gross salary, deducted 20% to get notional salary and then taxed the slice of that above the remaining tax free allowance.

[darthblingbling]

The administrator should have considered the gross amount, but the problem is that the tax paid by the RPO is not actually paid to HMRC and the refund is usually done through the NI fund people themselves.

At the first stage I would perhaps speak to the RPO people and bring this issue up. Perhaps the correct course is to claim the gross amount from them and pay the correct tax on your self assessment.