Redundant?? The Taxman could pay up!

Redundancy tax rebate: do you qualify?

The tax rebate system can confuse accountants, but there are some facts to remember about PAYE.

Your pay-as-you-earn position could lead to more money in your purse from an income tax rebate.

Unemployment is running at levels not seen since the early 1990s, with more than 2.5 million people out of work, but if you are one of the thousands who has been made redundant, there could be some good news. Thanks to the way the pay-as-you-earn tax system works, you could be due a sizeable rebate.

PAYE covers nearly 30 million people meeting their tax obligations this way. The system is operated by your employer which deducts tax based on your allowances and earnings, split across 12 months of the year. For example, if you earn £30,000 a year and your personal tax allowance is £7,475 for this tax year, your tax-free allowance would be £622.92 a month and your salary £2,500 a month. The allowance would be subtracted, meaning you would be taxed on £1,877.08.

The system works reasonably well – until you are only working for part of the year, because then you won't have received all your annual allowance and will have overpaid tax. In short, if you were made redundant within a tax year and did not work for the remainder of that year, you should be due a rebate.

The amounts you could recoup are not insignificant. John Whiting, tax policy director for the Chartered Institute of Taxation, has worked out that someone earning £50,000 who was made redundant after six months would be due a sizeable sum. He said: "In 2010-11, PAYE would give you a personal allowance of £6,475. Assuming your salary is all you have, your tax bill would be £9,930 for the year. Then suppose you were made redundant after six months, having earned £25,000. Tax of 50% of £9,930 would have been deducted, giving a figure of £4,965. If you had no other income, you would be due the full personal allowance. Your tax bill for the year should be £3,705, so you'd be due about £1,260 back."

Fact 

" Did you know? - Every day more and more mums are starting their own home based businesses to achieve flexible working hours, independence and more family time. Heart Finance agent opportunity is an exciting opportunity for you to work from home from as little hours as you can work . You can achieve a level of success with all the backing of a franchise, only without the massive investment. No skills, or experience required

As an agent of Heart Finance you will earn commission _up to 50% _  just for passing along  applications. You promote the services and let us do the rest.

For more information visit http://www.heartfinance.co.uk/agent.html "

Patricia Mock, director of Deloitte private client services, said she suspected that people are often not aware of what they are due. "If you were made redundant and received redundancy pay, probably the first £30,000 will have been exempt from tax. But there are occasions when it is not. If you have an employment contract which says you will receive a set amount if you are made redundant, that would be taxable. If it is not a written state of affairs, then you would get the payment tax-exempt."

If you have worked outside the UK, the amount could be even higher. "As well as the £30,000 exemption, if you have been working outside the UK and then got a termination payment, you can get a pro-rata amount exempted from UK tax," Mock said.

Depending on where you spent your time abroad, you may have been liable to pay tax in the other country, but it is important to ensure you claim this foreign service relief if it is relevant.

If you have shares in the company you are being made redundant from, these will also need to be considered when it comes to paying the right amount of tax, said Carol Dempsey, partner at PricewaterhouseCoopers.

"Let's say someone was made redundant in November, and everything they were due was paid in November, you would have expected them to receive their tax allowance to November, and their shares up to November. If this payment was made before the P45 was issued, then they may be able to reclaim a rebate in respect of December, January, February and March.

"But if they were then re-employed in February of the same tax year, you would expect the tax amount to be dealt with through PAYE."

HM Revenue & Customs has already said it will be paying rebates of around £300-£400 to up to 6 million people, and some of these will be payments linked to redundancy. However, about 1.2 million people will be told they need to pay the Revenue an extra £500-£600 on average.

If you owe the Revenue money, it is better to find out sooner rather than later, while you have the money to pay the tax at the start of the process. You can claim a rebate using form P50, if you are sure you will not be working again in the tax year, Mock said. Otherwise, you should make your claim through your tax return.

from the Guardian