PILON taxed at higher rate
Discussion
Morning all, I’m asking here as I can’t find a similar case study on Google.
I was made redundant last week, because I’ve only been there for 9 months I am only entitled to my contract notice period and I knew this would be taxable. However, it has been taxed at 40% which I was not expecting.
Salary £50,000
Terminated as of today for full February pay period plus 3 months PILON. I’ve been paid today 4 months salary and taxed 40% on all of it.
I can see now that the PILON takes me into the Higher Rate for this tax year, so that is “correct” but the ACAS and gov.uk statements on PILON is “ You'll pay tax and National Insurance on the part of your termination payment equivalent to what you'd have earned if you were working.”
Therefore if I’d continued to work my notice period I’d not have been taxed 40%.
Am I a) taxed incorrectly and my former employer should sort it out
b) taxed incorrectly and have to wait for HMRC to sort it out
c) s
t out of luck, my redundancy falling so close to tax year end means I fall between the cracks?
I was made redundant last week, because I’ve only been there for 9 months I am only entitled to my contract notice period and I knew this would be taxable. However, it has been taxed at 40% which I was not expecting.
Salary £50,000
Terminated as of today for full February pay period plus 3 months PILON. I’ve been paid today 4 months salary and taxed 40% on all of it.
I can see now that the PILON takes me into the Higher Rate for this tax year, so that is “correct” but the ACAS and gov.uk statements on PILON is “ You'll pay tax and National Insurance on the part of your termination payment equivalent to what you'd have earned if you were working.”
Therefore if I’d continued to work my notice period I’d not have been taxed 40%.
Am I a) taxed incorrectly and my former employer should sort it out
b) taxed incorrectly and have to wait for HMRC to sort it out
c) s
t out of luck, my redundancy falling so close to tax year end means I fall between the cracks?Linksmas said:
Morning all, I’m asking here as I can’t find a similar case study on Google.
I was made redundant last week, because I’ve only been there for 9 months I am only entitled to my contract notice period and I knew this would be taxable. However, it has been taxed at 40% which I was not expecting.
Salary £50,000
Terminated as of today for full February pay period plus 3 months PILON. I’ve been paid today 4 months salary and taxed 40% on all of it.
I can see now that the PILON takes me into the Higher Rate for this tax year, so that is “correct” but the ACAS and gov.uk statements on PILON is “ You'll pay tax and National Insurance on the part of your termination payment equivalent to what you'd have earned if you were working.”
Therefore if I’d continued to work my notice period I’d not have been taxed 40%.
Am I a) taxed incorrectly and my former employer should sort it out
b) taxed incorrectly and have to wait for HMRC to sort it out
c) st out of luck, my redundancy falling so close to tax year end means I fall between the cracks?
When you say you have paid 40% income tax on all of it does that include your normal monthly pay? I am not surprised that the PILON has been taxed at the higher rate but if you have no other paid work before the end of the tax year then you may get a refund of some of the tax paid.I was made redundant last week, because I’ve only been there for 9 months I am only entitled to my contract notice period and I knew this would be taxable. However, it has been taxed at 40% which I was not expecting.
Salary £50,000
Terminated as of today for full February pay period plus 3 months PILON. I’ve been paid today 4 months salary and taxed 40% on all of it.
I can see now that the PILON takes me into the Higher Rate for this tax year, so that is “correct” but the ACAS and gov.uk statements on PILON is “ You'll pay tax and National Insurance on the part of your termination payment equivalent to what you'd have earned if you were working.”
Therefore if I’d continued to work my notice period I’d not have been taxed 40%.
Am I a) taxed incorrectly and my former employer should sort it out
b) taxed incorrectly and have to wait for HMRC to sort it out
c) s
t out of luck, my redundancy falling so close to tax year end means I fall between the cracks?The tax due is based on your taxable income for the whole of the tax year. The amount deducted each month is the PAYE system attempting to get to the right figure by the end of the year. At this point it thinks that instead of your taxable income for the year being £50k it will be £62.5k.
Yep, I’ve received one payslip showing four months pay and all taxed together. I’ve already asked my previous employer if that is the correct way to issue it.
I started here in June and was employed before that at basic rate. (The sum of those earning and this is still less than £62.5k) Because the PAYE calculation is as you explained and it’s not taking the tax pro-rata either it is a hefty chunk deducted.
I guess I now have to wait until November for HMRC to recognise I didn’t earn £62.5k and issue me a refund? Kind of sucks because money now would be better than money later.
I started here in June and was employed before that at basic rate. (The sum of those earning and this is still less than £62.5k) Because the PAYE calculation is as you explained and it’s not taking the tax pro-rata either it is a hefty chunk deducted.
I guess I now have to wait until November for HMRC to recognise I didn’t earn £62.5k and issue me a refund? Kind of sucks because money now would be better than money later.
If you are being taxed under PAYE, which you appear to be, then taxable income and allowances are cumulative during the year. In essence each month a new tax due to date figure is calculated and then the tax paid previously is deducted.
For this month, February, the total you have earned/been paid for the year so far is your total income, then deduct 11/12ths of your annual allowance to calculate your taxable to date. If you are on the standard tax code (shown on your payslip) of 1257L then your tax-free income to date will be total income minus £11,522. The amount taxable to date at 20% is £34,558 with the excess at 40%. In other words (using standard codes) your total income to date must be less than £46,080 to keep below the 40% bracket. Anything over will be at 40%.
I hope this helps.
For this month, February, the total you have earned/been paid for the year so far is your total income, then deduct 11/12ths of your annual allowance to calculate your taxable to date. If you are on the standard tax code (shown on your payslip) of 1257L then your tax-free income to date will be total income minus £11,522. The amount taxable to date at 20% is £34,558 with the excess at 40%. In other words (using standard codes) your total income to date must be less than £46,080 to keep below the 40% bracket. Anything over will be at 40%.
I hope this helps.
Linksmas said:
Thank you MustangGT, that makes perfect sense. I still feel robbed but appreciate the explanation of it all.
On the plus side you will have paid only 3% NI as opposed to 13.8% (where the tax rate goes up to 40% the NI rate comes down by about 10%) and, unlike income tax, NI isnt cumulative.davek_964 said:
Hughesie said:
Have they done anything at a Tax Free rate - Normally the first £30k is tax free for redundancy ?
Of redundancy pay, yes. Of Pilon - no.QuickQuack said:
davek_964 said:
Hughesie said:
Have they done anything at a Tax Free rate - Normally the first £30k is tax free for redundancy ?
Of redundancy pay, yes. Of Pilon - no.Linksmas said:
I was made redundant last week, because I’ve only been there for 9 months I am only entitled to my contract notice period and I knew this would be taxable.
QuickQuack said:
That's a very poorly constructed redundancy package. It's not difficult to create package which practically gives you the same enhanced benefits as a PILON but without having to pay tax and NI on the first £30k.
It is Pay In Lieu of Notice. He is being paid the same sums as he would have been had he worked his notice period. There is no tax free amount etc for PILON, it is contractual. davek_964 said:
QuickQuack said:
davek_964 said:
Hughesie said:
Have they done anything at a Tax Free rate - Normally the first £30k is tax free for redundancy ?
Of redundancy pay, yes. Of Pilon - no.Linksmas said:
I was made redundant last week, because I’ve only been there for 9 months I am only entitled to my contract notice period and I knew this would be taxable.
but I've been in a similar situation a few years ago when the company decided to pull out of Europe, and they constructed it as a redundancy. It's up to the company to prepare the packages. Whether the OP is entitled to redundancy or not does not stop their company from putting the payment into a redundancy wrapper, it's up to their discretion. Many redundancy packages are more generous than statutory minimum, so it's not unusual. Linksmas said:
Yep, I’ve received one payslip showing four months pay and all taxed together. I’ve already asked my previous employer if that is the correct way to issue it.
I started here in June and was employed before that at basic rate. (The sum of those earning and this is still less than £62.5k) Because the PAYE calculation is as you explained and it’s not taking the tax pro-rata either it is a hefty chunk deducted.
I guess I now have to wait until November for HMRC to recognise I didn’t earn £62.5k and issue me a refund? Kind of sucks because money now would be better than money later.
You can always phone up HMRC and explain the situation to see if they can issue a rebate early. Be warned, however, that you'll be in for a wait! I had to call them yesterday morning and I was on hold for 86 minutes before they answered! I started here in June and was employed before that at basic rate. (The sum of those earning and this is still less than £62.5k) Because the PAYE calculation is as you explained and it’s not taking the tax pro-rata either it is a hefty chunk deducted.
I guess I now have to wait until November for HMRC to recognise I didn’t earn £62.5k and issue me a refund? Kind of sucks because money now would be better than money later.
QuickQuack said:
davek_964 said:
QuickQuack said:
davek_964 said:
Hughesie said:
Have they done anything at a Tax Free rate - Normally the first £30k is tax free for redundancy ?
Of redundancy pay, yes. Of Pilon - no.Linksmas said:
I was made redundant last week, because I’ve only been there for 9 months I am only entitled to my contract notice period and I knew this would be taxable.
but I've been in a similar situation a few years ago when the company decided to pull out of Europe, and they constructed it as a redundancy. It's up to the company to prepare the packages. Whether the OP is entitled to redundancy or not does not stop their company from putting the payment into a redundancy wrapper, it's up to their discretion. Many redundancy packages are more generous than statutory minimum, so it's not unusual. It is PILON and is therefore taxable. Pretending it isn't - and is actually a redundancy package and hence tax free (up to the limit) is surely fraud.
davek_964 said:
Surely it isn't up to the company.
It is PILON and is therefore taxable. Pretending it isn't - and is actually a redundancy package and hence tax free (up to the limit) is surely fraud.
Correct. You have to have been employed at least 2 years to be eligible for redundancy pay, therefore it is not an option for the OP.It is PILON and is therefore taxable. Pretending it isn't - and is actually a redundancy package and hence tax free (up to the limit) is surely fraud.
MustangGT said:
davek_964 said:
Surely it isn't up to the company.
It is PILON and is therefore taxable. Pretending it isn't - and is actually a redundancy package and hence tax free (up to the limit) is surely fraud.
Correct. You have to have been employed at least 2 years to be eligible for redundancy pay, therefore it is not an option for the OP.It is PILON and is therefore taxable. Pretending it isn't - and is actually a redundancy package and hence tax free (up to the limit) is surely fraud.
However it seems like the Employee is contractually entitled to PILON. If the employer gives him the PILON money but dressed up as "redundancy pay" to avoid tax there's an exceptionally small risk that HMRC might check and ask why he got redundancy (which wasn't in his contract) but didn't get PILON (which WAS in his contract.
Long story short - there's no benefit to the Employer in fudging the payment
Any employer worth their salt would have constructed this in an advantageous way to the Employee to have paid as little tax as possible, we've done it on PILON and we've done it with a compromise agreement and straight forward redundancies as well, generally very little risk to the employer, and I've been in this game for 30 years and never seen HMRC flag anything near like this as an issue.
Hughesie said:
Any employer worth their salt would have constructed this in an advantageous way to the Employee to have paid as little tax as possible, we've done it on PILON and we've done it with a compromise agreement and straight forward redundancies as well, generally very little risk to the employer, and I've been in this game for 30 years and never seen HMRC flag anything near like this as an issue.
You say there is very little risk and you're probably right. I can't recall the last time we were audited by HMRC. However there IS risk, this is something that's being done deliberately to minimise the employee's tax, and there's zero benefit for the Employer. So the question is - why would the Employer put themself at risk for no benefit?Gassing Station | Jobs & Employment Matters | Top of Page | What's New | My Stuff