Electric Trainer

Taxable Redundancy Pay - a big tweak

Although I focus on business skills in my workshops, I inevitably meet a lot of people who are thinking of setting up on their own after receiving some sort of redundancy package.

Everyone seems to know that the first £30K of a redundancy package is tax-free. What happens to any amount over the £30K is not nearly so easily understood.

A recent change to the rules has caught out at least one of my trainees, so I thought I'd try to clarify what's going to happen if you are lucky enough to be the recipient of more than £30K in redundancy pay.

It used to be the case that any extra (over £30K) was taxed at the basic rate of income tax (20%). This was good and bad.  Good: because you had less taken away at first, even if you owed more later (because you might actually have been a higher rate tax payer). Bad: because some people forgot that they would owe tax on what they received, and spent it all before this became clear to them.

The change that's just come in is to do with the rate of tax for the extra pay - the amount above the tax-free £30K. The extra is now usually taxed at the top rates of income tax - i.e. 40% or 50%. In effect the 'good' vs 'bad' scenario has been reversed. 

It's now 'good' because you can't forget to pay tax on the extra pay which you might owe at the end of the tax year. But it's 'bad' because they take it away from you up front.

You can't invest it yourself to earn some interest. And presuming you are a lower rate tax payer you will have to wait till the end of the tax year until you can get it back.

So that's improved cash flow for HMRC, and much less cash flow for the person trying to get a new business off the ground.

It's a bit rubbish if you ask me. But then no one did. In fact I don't remember seeing this anywhere before they introduced it.

It seems particularly harsh as only a tiny percentage of earners in the UK are actually 50% tax payers.

And I know of at least one person who was badly advised in advance of the change, being told that his taxable redundancy pay would be taxed at 20% when in fact it was taxed at 50%.

There's a transcript of a BBC Moneybox interview about this in February. Sorry I didn't spot it then.

You can read the transcript on the Moneybox website. The relevant item is towards the end of the programme. (Hat tip to Geoff Adams-Spink for spotting.)

For more info, Direct Gov also has details of the redundancy payments helpline.

Another year, another tweak

So here we are again at the start of the new financial year. Happy New Year!

You've probably noticed stuff about changes to tax and national insurance thresholds.

Apart from sounding very dull, most of this involves tweaks to a creaking system which makes little sense to right minded people.

Mr Osborne says he's going to have a good look at how the Treasury collects our money, possibly putting tax and national insurance into one big tax to make it simpler. A bit like the the simplifying approach they've proposed for the state pension and universal credit.

We'll see.

Meanwhile are there any changes which make a difference on a daily basis to small businesses and freelances like you and me?

Well if you've been following my tweets over the last two weeks you'll have spotted a few small ones.

The car mileage allowance for business trips goes up to 45p per mile. It's been 40p per mile since 2002, so not exactly generous, but hey....

The motorbike (24p) and cycle (20p) mileage rates are not being changed it seems.

If you are trying to avoid VAT, the new level at which you have to be VAT registered is £73,000 turnover. That applies to sole traders as well as limited companies, remember. And it's turnover, not profit.

Things for freelances to look out for in the longer term include a possible re-vamping of IR35 legislation (which stops people pretending to be self-employed when they're really acting like an employee). But that probably won't happen until tax and national insurance are re-invented.

If you're a former trainee, all your handouts and downloads are now updated with new info for 2011-12.

And will this be the year where you starting keeping your expenses records from day one as you go along? Put aside 5 minutes every week to do it and you'll have pretty well completed your tax return by this time next year. 

Enjoy!