Goodbye, job hello, taxman

Job Losses seem to happen with depressing regularity, but at least the blow is often softened by a pay-off. The ex-employee departs, not exactly happy, but with something of a nest-egg to keep him going until the next job.

As that nest-egg is counted, thoughts may turn towards tax ... But surely there isn't tax on a redundancy pay-off? Surely it's tax-free? Even if there is tax, the first pounds 30,000 is tax-free, isn't it?

Unfortunately, not all pay-offs escape the Inland Revenue's clutches - and that pounds 30,000 exemption isn't always available. This is an area of increasing attention from the taxman. The argument is usually over what is strictly a pounds 30,000 exemption on a "payment for loss of office". If you lose your job and get a payoff, then fine, the first pounds 30,000 is tax-free.

The problem is, was the payment really for losing your job? Increasingly, the Revenue is arguing that pay-offs come from the employment contract and therefore are something to do with the job - not with losing it.

This may seem like splitting fiscal hairs. But the exemption costs the Revenue about pounds l.5bn a year, so it is paying close attention. And under special scrutiny now are payments in lieu of notice (Pilons).

A straight redundancy payment, often under statutory rules, will always qualify for the pounds 30,000 exemption. So will an ex gratia payment - if it is really paid out of the goodness of the ex-employer's heart and without any obligation. The problems start when there is an alleged obligation on the employer.

Often, individuals get an extra amount, possibly when they are being asked to leave quickly. This is the Pilon that is under attack from the Revenue. But is such a payment really taxable? Much can depend on the wording of the employment contract.

The Revenue argues that if the contract specifically says an employee is entitled to a Pilon on leaving, the payment comes from the job rather than from losing it. The taxman makes a similar point if the employer has discretion to pay a Pilon. It even tries to argue that if the employer starts to make a habit of paying Pilons, that raises expectations and thus means it's all coming from the contract.

My feeling is that the Revenue is on shaky ground with many of its claims. Fundamentally, the pay-off is coming from losing the job, not from the contract.

But the Revenue's efforts in this area have been buoyed by a recent case involving Thorn EMI where contractual Pilons were held to be taxable as if part of salaries rather than part of the redundancy amounts qualifying for the pounds 30,000 exemption. This case may go to appeal, but the Revenue does seem to have won a battle in what is becoming a drawn-out war.

So what can the employer, or the ex-employee, do? Companies will, after all, be the first line of attack for PAYE and National Insurance contributions on pay-offs.

The first point to note is that some payments are always going to be regarded as taxable in full. If you get a pay-off for finishing current projects or for "gardening leave" (where people are sent home to kick their heels rather than rush off to join the competition) then expect the payment to be taxed in full. But on anything else - argue.

Particular care needs to be taken if someone near retirement age is leaving. While contributions to the pension scheme would normally escape tax, a cash pay-off may be taxed as an "unapproved" pension scheme.

If there is scope for having contracts of employment that do not mention the possibility of a Pilon, that helps. For just such a reason, some employees are now finding that their employers are trying to change the contracts. This is all very well, but naturally enough, not all employees want to lose the promise of a Pilon if the worst happens.

In some cases, separate side agreements are being drawn up distinct from the employment contract when somebody is leaving or indeed signing up for their contract. That in itself raises additional problems, as the Revenue has yet another weapon in its armoury dealing with payments during a contract for "giving an undertaking".

All in all, this is a far from ideal situation. Losing a job is a traumatic enough experience - but finding that some of your pay-off has disappeared in tax is hardly calculated to make you feel better.

Employers are best advised to take care, and preferably advice, in this area to ensure that their employees do not lose out. After all, they may be leaving you but you do want them to go off with a good feeling and not an unnecessary tax bill.

q John Whiting is a tax partner with Price Waterhouse.

The data shows that the number of “unlawfully” large infant classes has doubled in the last 12 months alone
i100Mike Stuchbery, a teacher in Great Yarmouth, said he received abuse
Arts and Entertainment
The starship in Star Wars: The Force Awakens
filmsThe first glimpse of JJ Abrams' new film has been released online
Rio Ferdinand returns for QPR
sportRio Ferdinand returns from his three-game suspension today
The Speaker of the House will takes his turn as guest editor of the Today programme
arts + ents
ebooksNow available in paperback

Watch the spoof Thanksgiving segment filmed for Live!
Billy Twelvetrees will start for England against Australia tomorrow with Owen Farrell dropping to the bench
rugbyEngland need a victory against Australia today
Arts and Entertainment
The cover of The Guest Cat – expect to see it everywhere
Tyson Fury poses outside the Imperial War Museum in south London ahead of his fight against Dereck Chisora
All British heavyweight clash gets underway on Saturday night
i100 Charity collates series of videos that show acts of kindness to animals
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Austen Lloyd: Company Secretary

Excellent Package: Austen Lloyd: EAST ANGLIA - SENIOR SOLICITOR LEVEL ROLE** -...

Citifocus Ltd: German Speaking Client Specialist

£Attractive Package: Citifocus Ltd: Prestigious asset management house seeks a...

Citifocus Ltd: Performance & Risk Oversight

£Negotiable: Citifocus Ltd: This is a varied role focusing on the firm's mutua...

h2 Recruit Ltd: Sales Director - SaaS (SME/Channel) - £140,000 OTE

£90000 - £140000 per annum + benefits: h2 Recruit Ltd: Are you a high achievin...

Day In a Page

Homeless Veterans Christmas Appeal: ‘We give them hope. They come to us when no one else can help’

Christmas Appeal

Meet the charity giving homeless veterans hope – and who they turn to when no one else can help
Should doctors and patients learn to plan humane, happier endings rather than trying to prolong life?

Is it always right to try to prolong life?

Most of us would prefer to die in our own beds, with our families beside us. But, as a GP, Margaret McCartney sees too many end their days in a medicalised battle
Thomas Cook's outgoing boss Harriet Green got by on four hours sleep a night - is that what it takes for women to get to the top?

What does it take for women to get to the top?

Thomas Cook's outgoing boss Harriet Green got by on four hours sleep a night and told women they had to do more if they wanted to get on
Christmas jumper craze: Inside the UK factory behind this year's multicultural must-have

Knitting pretty: British Christmas Jumpers

Simmy Richman visits Jack Masters, the company behind this year's multicultural must-have
French chefs have launched a campaign to end violence in kitchens - should British restaurants follow suit?

French chefs campaign against bullying

A group of top chefs signed a manifesto against violence in kitchens following the sacking of a chef at a Paris restaurant for scalding his kitchen assistant with a white-hot spoon
Radio 4 to broadcast 10-hour War and Peace on New Year's Day as Controller warns of cuts

Just what you need on a New Year hangover...

Radio 4 to broadcast 10-hour adaptation of War and Peace on first day of 2015
Cuba set to stage its first US musical in 50 years

Cuba to stage first US musical in 50 years

Claire Allfree finds out if the new production of Rent will hit the right note in Havana
Christmas 2014: 10 best educational toys

Learn and play: 10 best educational toys

Of course you want them to have fun, but even better if they can learn at the same time
Paul Scholes column: I like Brendan Rodgers as a manager but Liverpool seem to be going backwards not forwards this season

Paul Scholes column

I like Brendan Rodgers as a manager but Liverpool seem to be going backwards not forwards this season
Lewis Moody column: Stuart Lancaster has made all the right calls – now England must deliver

Lewis Moody: Lancaster has made all the right calls – now England must deliver

So what must the red-rose do differently? They have to take the points on offer 
Cameron, Miliband and Clegg join forces for Homeless Veterans campaign

Cameron, Miliband and Clegg join forces for Homeless Veterans campaign

It's in all our interests to look after servicemen and women who fall on hard times, say party leaders
Millionaire Sol Campbell wades into wealthy backlash against Labour's mansion tax

Sol Campbell cries foul at Labour's mansion tax

The former England defender joins Myleene Klass, Griff Rhys Jones and Melvyn Bragg in criticising proposals
Nicolas Sarkozy returns: The ex-President is preparing to fight for the leadership of France's main opposition party – but will he win big enough?

Sarkozy returns

The ex-President is preparing to fight for the leadership of France's main opposition party – but will he win big enough?
Is the criticism of Ed Miliband a coded form of anti-Semitism?

Is the criticism of Miliband anti-Semitic?

Attacks on the Labour leader have coalesced around a sense that he is different, weird, a man apart. But is the criticism more sinister?
Ouija boards are the must-have gift this Christmas, fuelled by a schlock horror film

Ouija boards are the must-have festive gift

Simon Usborne explores the appeal - and mysteries - of a century-old parlour game