Where an individual is made redundant a tax-free amount of up to £30,000 can be paid, but care must be taken as not all termination payments qualify. In order to qualify as a tax-free payment, the sum must relate specifically to the cessation of the employment, rather than to duties already performed or to be performed in the future.
There are special rules for payments which are made to an employee after the cessation date of their contract. The leaver's form P45 will show the gross pay and tax deducted up to the date of leaving and the final PAYE code that was operated. Any payments made after the P45 has been prepared must be subjected to a 0T code on a non-cumulative basis, which means the relevant tax rate is deducted from the gross amount, no personal allowances.
The income will need to be declared on a self assessment return and the tax will need to be paid by 31 January following the tax year in which the sum is received. If you receive a lump sum payment this summer, that will be assessable on the tax return for the year ending 5 April 2021 and therefore any additional tax due must be paid to reach the Collector by 31 January 2022.
Where termination payments consist of a number of different sums relating to loss of office, payment in lieu of notice, holiday pay and possibly disability elements and free shares, the tax situation can be very complex. For guidance and advice, please contact us.
Last updated: 26th October 2020This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.