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Tony Tax
Tony Tax, Tax Consultant
Category: UK Tax
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Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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I was made redundant in February this year. In essence, my

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Hi, I was made redundant in February this year. In essence, my settlement package consists of a number of different compensation elements and these have been paid over two different tax years. I received a gross payment of £81,000 in February consisting of £30,000 tax free redundancy pay and lieu pay and holiday pay which was taxed at 45%. I was then issued with my P45. At the end of April I received a profit share payment and confidentiality payment, which had been agreed as part of my settlement agreement, and this has been taxed at around 45% with the emergency tax code of OT MT1. The April payment was £23,000 gross. I believe that the April payment should be paid at the basic rate tax level rather than the 45% level. Is that correct and what process do I need to follow to obtain a refund from HMRC?
Submitted: 1 year ago.
Category: UK Tax
Expert:  Tony Tax replied 1 year ago.
Hi.
Your former employer was correct when it used a code of 0T M1 for the payment made at the end of April 2015. This tax code is enforced for post P45 payments. It will nearly always result in the taxpayer paying too much tax and put the onus on them to claim a repayment.
Previously, only 20% tax was deducted from such payments even if it was obvious there would be a higher rate tax liability and, surprise surprise, individuals would spend the money and two years later receive a tax bill they couldn't pay. Millions in unpaid tax was written off because of this.
You can apply for an in year repayment if you don't intend to work again during the current tax year by completing a form P50 and sending it to the tax office. The form P50 can be found here:
https://www.gov.uk/government/publications/income-tax-claiming-tax-back-when-you-have-stopped-working-p50
There are also some useful notes here:
http://findlaw.co.uk/law/tax/taxes/income_tax/tax_refunds/9474.html
If you did take a new job, then you will need to wait until the end of the current tax year to have your tax position for 2015/16 reviewed and any excess tax deducted repaid to you. If you were given a second P45 for the £23,000 payment, you could have handed that to a new employer and the excess tax would be repaid through the PAYE system, though not necessarily all at once.
You should have your 2014/15 tax position reviewed by asking HMRC for a P800 if you are not in the self-assessment system. Call them on 0300(###) ###-####
I hope this helps but let me know if you have any further questions.
Customer: replied 1 year ago.
Thank you. I do not intend to work again this tax year as I am in the process of starting a business. Can you please confirm that the £23,000 payment should be taxed at the 20% tax bracket and that I am entitled to a refund? I am concerned to know if HMRC have any justification for claiming that this should be taxed at the same rate as the February redundancy payment, despite it being paid in April and for a profit share payment.
Expert:  Tony Tax replied 1 year ago.
If you have no other income in 2015/16, then you will pay tax on £12,400 (£23,000 - £10,600) at 20% (£2,480.00) so you will be due a repayment of the excess tax.
The form P50 should only be used if you don't expect to go back to work. If you start a business, then you will be working and will have to wait until you have submitted a tax return disclosing your £23,000 payment and your business results to have your tax position for 2015/16 assessed.
I explained why the 0T M1 code was used in my answer and I can assure you that it is perfectly legal. The fact that 45% in tax has been deducted doesn't mean that you won't get any back. It's done this way to avoid a loss of revenue to the Treasury. If you have paid too much tax, you will be entitled to claim a repayment of the excess. Take a look here for the procedure employers/former employers have to use:
http://www.hmrc.gov.uk/manuals/pommanual/paye74015.htm
Customer: replied 1 year ago.
Thank you. Just for confirmation, are there any grounds whereby the HMRC would consider the April payment should be taxed at the same rate as the February payment as it forms part of a settlement agreement attached to employment terminated in February? This is my last question on the issue.
Expert:  Tony Tax replied 1 year ago.
I see no reason why they would agree to that. As far as I can see your former employer has done eveything correctly and you may be able to get some tax back at some point which won't be the case if the £23,000 payment is backdated to February in a tax year when your income was higher than it may be in 2015/16.

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