Check on a redundancy tax calculation
Discussion
Hi
If someone was to receive a £60k redundancy payment at the end of April 2026, and not work for the remainder of the 2026/27 tax year, how would tax on the payment be calculated?
Total income for the tax year would be one month's pay + the redundancy payment.
The first £30k would be tax free.. Would the rates payable on the payment be calculated based on the rates applicable to the £30k (above the £30k tax free) treated as if they are earning £42,750 (£30k + personal allowance) in the year? That would be 20% + NI.
Or on the person's usual marginal rate, then adjusted automatically by HMRC at the year end and refunded? Or need to be reclaimed via a tax return?
Or?
If someone was to receive a £60k redundancy payment at the end of April 2026, and not work for the remainder of the 2026/27 tax year, how would tax on the payment be calculated?
Total income for the tax year would be one month's pay + the redundancy payment.
The first £30k would be tax free.. Would the rates payable on the payment be calculated based on the rates applicable to the £30k (above the £30k tax free) treated as if they are earning £42,750 (£30k + personal allowance) in the year? That would be 20% + NI.
Or on the person's usual marginal rate, then adjusted automatically by HMRC at the year end and refunded? Or need to be reclaimed via a tax return?
Or?
The extra £30k would push you into the higher (possibly even additional) rate of tax so you would be taxed at 40/45%.
Assuming you have no other income for the rest of the year you can claim back the overpaid tax either after year end or you can contact HMRC "in year" and they may be able to refund the excess.
Assuming you have no other income for the rest of the year you can claim back the overpaid tax either after year end or you can contact HMRC "in year" and they may be able to refund the excess.
My recollection is that you'd be liable for income tax on anything above £42,750.
However, you'll probably find that the payroll assumes that you are going to earn the same amount each month for the rest of the tax year, so they'll take a lot of tax off you, which you'll have to claim back.
However, you'll probably find that the payroll assumes that you are going to earn the same amount each month for the rest of the tax year, so they'll take a lot of tax off you, which you'll have to claim back.
Thanks both.
Countdown - what would the 30k (above tax free) be added to in order to determine the marginal rate you suggest - other income and the personal allowance?
Trevalvole - your suggesting that beyond the £30k tax free redundancy, the personal allowance (say £12,750) is still applicable for income tax purposes. That makes sense tbh.
Combining the two (sort of!) says to me that all payments above the £30k tax free are treated as income and as such, the personal allowance applies and marginal tax rates based on those payments.
Tax is likely to be as per normal payroll PAYE rates so tax will need to reclaimed from HMRC.
Countdown - what would the 30k (above tax free) be added to in order to determine the marginal rate you suggest - other income and the personal allowance?
Trevalvole - your suggesting that beyond the £30k tax free redundancy, the personal allowance (say £12,750) is still applicable for income tax purposes. That makes sense tbh.
Combining the two (sort of!) says to me that all payments above the £30k tax free are treated as income and as such, the personal allowance applies and marginal tax rates based on those payments.
Tax is likely to be as per normal payroll PAYE rates so tax will need to reclaimed from HMRC.
trevalvole said:
My recollection is that you'd be liable for income tax on anything above £42,750.
However, you'll probably find that the payroll assumes that you are going to earn the same amount each month for the rest of the tax year, so they'll take a lot of tax off you, which you'll have to claim back.
From direct experience ^^^^^ This.However, you'll probably find that the payroll assumes that you are going to earn the same amount each month for the rest of the tax year, so they'll take a lot of tax off you, which you'll have to claim back.
Lots of tax taken and big rebate at the start of the next tax year.
You can mitigate the tax by salary sac into a pension
I might have this problem in 2027 when I retire, I'll get my lat pay cheque mid March, and then at beginning of April I will receive my first pension payment along with a lump sum. Lump sum aside, the tax man will probably see my wages and first pension payment as regular income for the following tax year.
Nothingtoseehere said:
Thanks both.
Countdown - what would the 30k (above tax free) be added to in order to determine the marginal rate you suggest - other income and the personal allowance?
It would be added to your normal pay for that month. Assuming you didnt have any normal pay and you have a normal tax code I think the breakdown would be as follows;Countdown - what would the 30k (above tax free) be added to in order to determine the marginal rate you suggest - other income and the personal allowance?
£1,047 tax free
£3,119 at 20%
£25,834 at 40%
As has been suggested because it's Month 1 on the payroll the system will assume that you're on £360k per annum unless payroll do a manual override by changing your tax code. normally the extra tax would get refunded automatically in the following months once the system figured out what your normal pay is but I assume you'll get removed from the payroll at the end of month 1.
The Gauge said:
I might have this problem in 2027 when I retire, I'll get my lat pay cheque mid March, and then at beginning of April I will receive my first pension payment along with a lump sum. Lump sum aside, the tax man will probably see my wages and first pension payment as regular income for the following tax year.
When I received my first drawdown from my private pension I was also in receipt of the first of 3 annual rebated bonuses from my old job. I paid emergency tax on the pension for that first month then HMRC corrected the tax code.
The bonus was correctly taxed.
But as I do SA I knew it would eventually balance out.
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