Keep a cool head if you are made redundant.
If you are faced with unemployment, keep a cool head and make sure you get the best possible redundancy deal, say chartered accountants.
With the highest rise in unemployment for 17 years announced this week, and predictions of 2 million jobless by Christmas, financial experts urge people to ensure their redundancy package is tax-efficient.
“When you lose your job, your termination package could consist of a mixture of things – statutory redundancy pay, extra redundancy pay the employer has decided to give you, maybe arrears of pay or pay in lieu of notice. These are all taxed in different ways,” says Jane Moore, of the Tax Faculty at the Institute of Chartered Accountants in England and Wales.
“You won’t have to pay tax or National Insurance contributions (NIC) on redundancy pay up to £30,000. Payments over the £30,000 limit are subject to tax (but not NIC) at the usual rates. It is especially important for higher rate taxpayers to bear this in mind.
“Statutory redundancy pay – what you are entitled to under employment law – is tax-free, but must be included in working out how much of your total payment is over £30,000.
“Any benefits you receive which are not money are given a cash value for tax and NIC purposes. If these are given to compensate for your redundancy, the cash value counts towards the £30,000 tax-free limit.
“Payments which you are entitled to under your employment contract – such as bonuses, commissions, holiday pay and pay in lieu of notice are taxable and subject to NIC. You might get a payment in return for agreeing to restrict your behaviour – for example, not poaching your former employer’s clients or staff – and this will be taxable. However, if your employer provides you with outplacement or similar counselling, it is tax-free.
“It may be worth asking for any taxable element of the package to be transferred directly into your pension. This will not attract NIC, so you may be able to negotiate a higher payment without it costing your employer a penny.
“If you have share options, you may be able to exercise them before you leave or within a certain time after. This should be carefully considered, especially if you believe their value will increase in the short or medium term.
“If you are paid before you leave your job, full deductions will be made through PAYE. If the money is paid after you have left and received your P45, only 20% tax will be deducted straight away. You will have to account for the rest in your annual tax return, but you will have the benefit of some extra cash in the meantime. If you don’t get sent annual tax returns and have more tax to pay, you should make sure your tax office knows about it.
“If you have been claiming tax credits, you must tell HMRC when you stop work. Your credits are likely to go up if you were only earning for part of the year. Alternatively, if you have not claimed tax credits yet, you may find that now your income has dropped you become eligible to receive some payments. Contact the HMRC tax credits helpline as soon as possible to make a claim. Tax credits claims can be backdated three months.”
She pointed out that the tax rules on redundancy packages are not straightforward, and employers and employees are advised to seek professional advice to make sure they are structured in the most tax-effective way.