Tax and redundancy

[josadler7]

Hi
I have just been told that after the consultation period my job is to be made redundant, the company (I have been here 18 months) has offered me a reasonable payout with my notice period of 2 months tax free. The agreement document states the Tax act 2003 (s403) as justification for not tax deduction but it then goes on to say that the company has no tax liability should HM revenue decide to the contrary. This is very worrying – can anyone confirm that tax is not paid or what their experience has been in similar circumstances?
Thank you very much in advance.

[Fitzer]

I know it predates the act but when I was made redundant in 1991 my notice monies, overtime and anything else was referred to as redundancy pay and so wasn't liable for tax. They seem to be covering themselves to say that if the govt. should decide that your salary in lieu of notice is taxable it will be down to you to pay the tax on it.

[factor-fiction]

Buildersmate will know but I think the issue of whether Pay in Lieu of Notice (sometimes called PILON) is tax free or not is not always a clear-cut issue.
I agree that the employer is just covering itself.
It's worth checking the HMRC site to see what it says about PILON.
I know the first £30000 of redundancy pay is tax free but I've never fully understood why PILON should be free of tax as well. I don't see why it should be treated differently to the pay of someone who has to work the full notice period for the same pay less tax.

[mike11111]

My experience last year was that my statutory redundancy payment was tax-free but my one month's salary in lieu of notice plus accrued holiday pay was taxable.

[buildersmate]

It's because PILON is not salary/earnings, F30 - it is money in respect of a breach (by the employer) of the contract. As it isn't earnings, no tax is income taxable is due on it.
I think you will find that the first £30k of severance (redundancy or PILON) is not taxable.

[kags]

As long as there is nothing whatsoever in your contract to say you would be paid in lieu of notice, then it will normally be tax free. However, in certain circumstances HMRC can argue that there was an expectation or a custom within the company of making such payments and it would therefore be taxable. Most companies are aware of this possibility and will ensure they do what is necessary to avoid it. This is what the clause in the document is referring to - they are covering their backs in the unlikely even that HMRC choose to challenge it.

[factor-fiction]

Hi Buildersmate,
Yes I realise PILON is normally tax free but I recall the HMRC has sometimes challenged this- I think kags is referring to this.

But my main point was that although PILON is normally tax free (because there has been a breach) I've never fully understood the logic. It just seems a bit anomolous to me in some circumstances. For example, if Bill has to work his 3 months notice and gets paid £6000 he has to pay maybe £1200 tax on that, whereas Ben who gets to sit at home for 3 months and gets his £6000 as PILON tax free.

[buildersmate]

But it is because there has been a breach, so the money is not earnings (sorry to be repeating myself).
If you went to court on another matter (say a dispute with your builder) a won a civil case for breach of contract, you wouldn't have to pay tax on that either.

[factor-fiction]

Hi BM- yes, I accept that it's a breach but, unlike your example of a building dispute, it seems to me that in an employment case it is a breach to which there can be a tacit agreement between the parties.
If instead of tax-free PILON the employer said "okay, there's no work, I'll continue to pay you monthly for the next three months and you can come 'work' from home or come in to the office if you want", then tax would be payable on the earnings.
I'm not sure why HMRC doesn't press this issue a bit more.

[Tom Braider]

http://www.hmrc.gov.u...eimanual/EIM12975.htm