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Where Taxpayers and Advisers Meet

Severance payments

Ross B
Posts:7
Joined:Wed Aug 06, 2008 3:27 pm

Postby Ross B » Wed Oct 08, 2008 12:04 pm

Hope someone can clarify:

My company has just has to get rid of a member of staff basically for non performance, but his positon is not going to be refilled. He has been with us for only 11 months and has been operating without a contract. In order to "see him right" we are going to pay him effectively 3 months salary.

Our payroll company is telling me that this is all taxable as he doesn't qualify for redundancy as he has been with the company less than 2 years, and his pay off is effectively in lieu of notice and therefore taxable.

If its a non contractual severance payment is he correct in his assertion?

Thanks in advance for any help.

R

Peter D
Posts:10668
Joined:Wed Aug 06, 2008 3:37 pm

Postby Peter D » Wed Oct 08, 2008 12:34 pm

Yes that is correct. Regards Peter

Ross B
Posts:7
Joined:Wed Aug 06, 2008 3:27 pm

Postby Ross B » Wed Oct 08, 2008 1:48 pm

Thanks Peter - is there a situation where it would be tax free or should he resign himself to paying the tax?

JSK TAXATION
Posts:200
Joined:Wed Aug 06, 2008 2:18 pm

Postby JSK TAXATION » Wed Oct 08, 2008 1:57 pm

R,

Things are not as straight forwards as Peter is suggesting.

Generally, a payment made on the termination of employment will be taxable as earnings where the employee is entitled to receive it under the terms of his contract. The contract may be express or implied.

Where the contract obliges the employer to make a payment when due period of notice is not given (a PILON), then this is also taxable under PAYE.

If there is no contractual position and a payment represents simply recompense for the termination of the employees contractual rights (i.e. compensation for loss of office) then if the payment is less than £30,000 then it is not taxable. If greater than £30K it is taxable to the extent it exceeds £30K.

Hope this provides a little more clarity. Kindest regards.

John S King
Chartered Tax Adviser
www.taxation-advice.com
John S King
Chartered Tax Adviser
e: help@taxation-advice.com
w: http://www.taxation-advice.com
01732 897850

Peter D
Posts:10668
Joined:Wed Aug 06, 2008 3:37 pm

Postby Peter D » Wed Oct 08, 2008 6:15 pm

Only if it is an HMRC approved redundancy package under there rules. Regards Peter

Ross B
Posts:7
Joined:Wed Aug 06, 2008 3:27 pm

Postby Ross B » Thu Oct 09, 2008 7:36 am

Thanks John/Peter..

..and does this 2 year period of employment impact on whether its a HMRC approved package?


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