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Is Severance Pay Taxable
22 Answers
A bit out of my depth on this one .. does anyone know >>>
After having been taken through a 'Capability Process' if you were to be dismissed at the 'Capability' hearing .. is the severance payment taxable ?
The payment will consist of 12 weeks back dated holiday pay and another
14 weeks for the notice period to be given by the employer to terminate the employment at short notice .. as in.. 1 week for every year spent in that employment.
In all it will be 26 weeks pay.
.. There are no disciplinary actions involved ..
After having been taken through a 'Capability Process' if you were to be dismissed at the 'Capability' hearing .. is the severance payment taxable ?
The payment will consist of 12 weeks back dated holiday pay and another
14 weeks for the notice period to be given by the employer to terminate the employment at short notice .. as in.. 1 week for every year spent in that employment.
In all it will be 26 weeks pay.
.. There are no disciplinary actions involved ..
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Its a complex area, and you need to be careful.
My belief is that holiday pay is taxable and you have to pay employee's NI on it. Regarding the pay in lieu of notice, it depends whether your contract of employment specifically makes reference to that you may be paid in lieu of notice (in the event of end of contract) then HMRC will say that both tax and NI is payable.
Note that this is different from redundancy payments, which are not taxable up to £30k.
You really need to ask your employer (who may be willing to informally advise, but won't indemnify against a HMRC decision, or seek independent tax advice.
It can usually be structured (the payment) to avoid the tax liability but it depends on the employer playing ball. There is incentive for them to do so - they won't have to pay the employer's NI or make payments into your company pension.
Lastly, if circumstances dictate that the payments would be taxable, you can avoid the tax by having the employer pay them into your pension scheme, if it suits you to do this.
My belief is that holiday pay is taxable and you have to pay employee's NI on it. Regarding the pay in lieu of notice, it depends whether your contract of employment specifically makes reference to that you may be paid in lieu of notice (in the event of end of contract) then HMRC will say that both tax and NI is payable.
Note that this is different from redundancy payments, which are not taxable up to £30k.
You really need to ask your employer (who may be willing to informally advise, but won't indemnify against a HMRC decision, or seek independent tax advice.
It can usually be structured (the payment) to avoid the tax liability but it depends on the employer playing ball. There is incentive for them to do so - they won't have to pay the employer's NI or make payments into your company pension.
Lastly, if circumstances dictate that the payments would be taxable, you can avoid the tax by having the employer pay them into your pension scheme, if it suits you to do this.
This gets more complicated by the minute .. if a request was made to make the payment into the pension scheme. Would the employer need to make their normal contribution ?
The pension scheme is quite a good one .. it's a final salary scheme and for every £100 the employee contributes,the emplyer pay's in approx £500 along with it.
Thanks for your assistance.
The pension scheme is quite a good one .. it's a final salary scheme and for every £100 the employee contributes,the emplyer pay's in approx £500 along with it.
Thanks for your assistance.
In my experience when employers facilitate you paying any severance pay into the pension scheme they don't ordinarily pay in the usual matching (or similar) amount. Some employers contribute almost double the employee contribution. If you are going to pay in maybe £15000 I cannot see them paying anything like that in too on top of hat they are paying you already. But you can always ask
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Any payment made by your employer under your contract of employment will be taxable as earnings. This includes any pay received during the notice period and any notice pay received as a lump sum, known as a payment in lieu of notice (PILON), but only if your written contract allows your employer to make a lump sum payment in lieu of notice.
Where your contract of employment does not allow your employer to end the contract immediately by making a lump sum payment instead of making you work your notice, ending the contract immediately will technically be a breach of contract. In these circumstances, the lump sum payment will be a payment of damages for that contract breach and you may be entitled to take the payment free of tax up to a limit of £30,000. Any question then of tax due will be subject to HM Revenue and Customs rules.
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Any payment made by your employer under your contract of employment will be taxable as earnings. This includes any pay received during the notice period and any notice pay received as a lump sum, known as a payment in lieu of notice (PILON), but only if your written contract allows your employer to make a lump sum payment in lieu of notice.
Where your contract of employment does not allow your employer to end the contract immediately by making a lump sum payment instead of making you work your notice, ending the contract immediately will technically be a breach of contract. In these circumstances, the lump sum payment will be a payment of damages for that contract breach and you may be entitled to take the payment free of tax up to a limit of £30,000. Any question then of tax due will be subject to HM Revenue and Customs rules.
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Since you have a 'final salary' pension scheme (lucky you) there is no point in my suggestion that you might consider putting taxable PILON payments into the company pension - it won't help as your eventual pension is driven by your salary on leaving. If your company has its own AVC scheme (and these are often run by the same pension scheme operator and thus enjoy smaller management fees than from a third-party FSAVC) you might want to consider making payments into that - particularly if you are over 55 and could thus (having not paid income tax on the severance payment) immediately get 25% of it back out again tax free, and the rest withdrawn progressively as a pension.
Another thing to think about is what parameters drive the pension paid by the 'final salary' - many schemes have a few calculation parameters that might include the average of the best three years from the last five, and/or the actual salary received in the final 12 months of employment. If you are closing in on retirement, having the severance paid in a way that boosts the 'final year' salary as recorded by the pension scheme (even if you have to pay 25% tax on it) may actually work out better for you because it drives up the start point of the start pension.
I appreciate this is more options than you thought at first, but I hope this is helpful in opening your eyes to thinking about the bigger picture for your income in future - not the immediate hassle of 'will this be taxed or not'.
Some employers will work with valued employees who are being let go - in particular if you have 14 years service - at structuring an output that assists the employee. They won't be able to give you advice though (which you may still need) in understanding the best option for you.
Good luck.
Another thing to think about is what parameters drive the pension paid by the 'final salary' - many schemes have a few calculation parameters that might include the average of the best three years from the last five, and/or the actual salary received in the final 12 months of employment. If you are closing in on retirement, having the severance paid in a way that boosts the 'final year' salary as recorded by the pension scheme (even if you have to pay 25% tax on it) may actually work out better for you because it drives up the start point of the start pension.
I appreciate this is more options than you thought at first, but I hope this is helpful in opening your eyes to thinking about the bigger picture for your income in future - not the immediate hassle of 'will this be taxed or not'.
Some employers will work with valued employees who are being let go - in particular if you have 14 years service - at structuring an output that assists the employee. They won't be able to give you advice though (which you may still need) in understanding the best option for you.
Good luck.
I agree, FF.
Yet one last thing to provide a little insight on.
Dismissing people on capability grounds is not in my experience all that common, yet it is of course one of the few (five in number, I think) 'fair' reasons for dismissal. The more common ones are 'conduct' (i.e. misconduct) or redundancy (which is better understood by most).
I'm not enquiring as to your circumstances, but 'capability' can be used in situations where an employer and employee come to a joint conclusion that the individual is finding it harder to maintain adequate performance as time moves on. This can include progressive mental or physical difficulties.
Now, as we have already discussed, declaring a 'redundancy' of the role can be a way of an organisation achieving separation from an employee, and of course the payments that are made are free of PAYE tax up to £30k.
It's merely a question of employer and employee agreeing the most appropriate route forward. I wonder if they would consider declaring your role redundant.
Yet one last thing to provide a little insight on.
Dismissing people on capability grounds is not in my experience all that common, yet it is of course one of the few (five in number, I think) 'fair' reasons for dismissal. The more common ones are 'conduct' (i.e. misconduct) or redundancy (which is better understood by most).
I'm not enquiring as to your circumstances, but 'capability' can be used in situations where an employer and employee come to a joint conclusion that the individual is finding it harder to maintain adequate performance as time moves on. This can include progressive mental or physical difficulties.
Now, as we have already discussed, declaring a 'redundancy' of the role can be a way of an organisation achieving separation from an employee, and of course the payments that are made are free of PAYE tax up to £30k.
It's merely a question of employer and employee agreeing the most appropriate route forward. I wonder if they would consider declaring your role redundant.
The long and short of it is I was involved in an incident at work 2 years ago.
At the time I never intended getting involved in any legal rangle. My only interest was in making a recovery and getting back to work. Since the incident I have been more or less incapacitated. Since surgery I am less able than I was before it. My employers have taken me through the Capability process as they feel I have since become high risk due to the nature of the disability I was left with. So yes the problem is physical difficulties.
All I will say is it's all in hand !
At the time I never intended getting involved in any legal rangle. My only interest was in making a recovery and getting back to work. Since the incident I have been more or less incapacitated. Since surgery I am less able than I was before it. My employers have taken me through the Capability process as they feel I have since become high risk due to the nature of the disability I was left with. So yes the problem is physical difficulties.
All I will say is it's all in hand !
OK, I was right.
There is of course a secondary issue related to the injury you received, and the issue of compensation. That of course is unrelated to your employment rights, and severance payment. I would assume you are in receipt of legal advice in relation to the employers` liability insurance company.
There is of course a secondary issue related to the injury you received, and the issue of compensation. That of course is unrelated to your employment rights, and severance payment. I would assume you are in receipt of legal advice in relation to the employers` liability insurance company.
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