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.
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