Have you paid too much tax on your redundancy payment? - LITRG Press Release

Published on 8 November 2013

Have you recently been made redundant as a result of insolvency? The LITRG has called attention to the fact that when an employer becomes insolvent, payments made by the Redundancy Payments Office (RPO) to employees will often have had tax deducted when it should not have been.

This is because the RPO is not an employer so does not operate a tax code on the payment. As a result they deduct basic rate tax from the payment, even though the first £30,000 of redundancy payments are usually tax free. Those receiving the compensation may pay too much tax on their redundancy payment. LITRG has urged all those who think they have been wrongly taxed on their redundancy repayment to check their accounts and contact HM Revenue & Customs (HMRC).

Anthony Thomas, Chairman of LITRG, elaborates:

“If you are made redundant and your employer cannot or will not make a redundancy payment, you may be able to claim a protective award from the RPO. You are normally eligible for a statutory redundancy payment if you have worked for your employer for more than two years. The tax rules on redundancy packages are complex, but redundancy payments are generally tax free up to the limit of £30,000. This means that if you receive a redundancy payment, it is likely to be exempt from tax. The package you receive, however, may also include elements that are taxable and liable to National Insurance contributions (NICs), such as unpaid salary or holiday pay.

“Unfortunately, when HMRC receive information about your redundancy payment from The Insolvency Service or RPO they are unable to identify whether or not any part of this is non-taxable. As a result, HMRC systems treat the full redundancy payment as taxable and include all of it in your P800 Tax Calculation. A solvent employer would normally only report the taxable element of a redundancy payment to HMRC. So even if you have paid too much tax, this will not show on the P800 Tax Calculation.

“It appears that HMRC are aware of this issue and that they have guidance in place on how to correct calculations that include payments from The Insolvency Service with a non-taxable element. However, HMRC only act on these instructions if you contact them. It is your responsibility to ensure that you have paid the correct amount of tax and to check notices you receive from HMRC, such as P800 Tax Calculations. If you have received a redundancy payment from The Insolvency Service, LITRG would encourage you to review your tax position to ensure that you have not paid too much tax. If you think you have overpaid tax, you can make a claim for repayment.”

Further information regarding the statutory amounts and limits of redundancy payments can be accessed here.

LITRG has produced a guide for claiming refunds back from HMRC, which can be accessed here.

More information can be found on the LITRG website.

(08-11-2013)

Contact: Joanne Walker (please use form at http://www.litrg.org.uk/ContactUs)