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Ask Employment Law |
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Remember: There is no substitute for legal advice on the actual
situation you find yourself in. The information posted on this site is for
general information only, is based on |
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Question: |
Is it true that payments made to employees on redundancy can be
paid free of
tax?
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Answer: |
If
any employee is being made redundant, then it may be possible for the
employer to make at least part of that payment to the employer without
deductions of tax or national insurance. The employer should get specific
legal advice before doing so. Ordinarily, the situation is as follows: ·
Wages to the termination date will be taxable. ·
Payment in lieu of holiday accrued but untaken to the
termination date will be taxable. ·
A statutory redundancy payment will not be taxable. ·
It may be possible to make a payment in lieu of notice
without deductions. Under the Income Tax (Earnings and Pensions)
Act, section 401 & 403 state that payments made in respect of “the
termination of a person’s employment” are only taxable insofar as they exceed
£30,000. However if the employer reserves the contractual right to
make a payment in lieu of notice, this will be considered to be a payment
made to the employee pursuant to the contract of employment and therefore
taxable. Even if there is no contractual agreement to make a payment in lieu
of notice, if it is the custom and practice of the employer to always
make a payment in lieu of notice, this could affect the taxable status of the
payment. If in doubt, always check with HM Revenue & Customs for relevant
guidance. ·
An enhanced redundancy payment may often be paid without
deductions of tax, insofar as the aggregate of payments on redundancy do not
exceed £30,000. However if it is the custom and practice of the employer to
always follow a certain formula to calculate the enhanced payment, then that
could affect the taxable status of the payment. ·
Any payment to the employee in return for an undertaking not to
enter into employment with a competitor following termination will be
taxable. (s225 of Income Tax (Earnings and Pensions) Act 2003) ·
Any other payment of employment income will be taxable
including (a) any salary, wages or fee, (b) any gratuity or other
profit or incidental benefit of any kind obtained by the employee if it is
money or money’s worth, or (c) anything else that constitutes an emolument of
employment See our page on compromise agreements and see www.compromise-agreement.org Last reviewed: July
2010 |
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Employment
Solicitor Reculver Solicitors Tel
0207 324 6271 Regulated
by the Solicitors Regulation Authority ©
Reculver Solicitors. 2005- |
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