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.

Start your day with The Independent, sign up for daily news emails
The Queen and the letter sent to Charlie
Arts and Entertainment
Eurovision Song Contest 2015
EurovisionGoogle marks the 2015 show
Two lesbians hold hands at a gay pride parade.
peopleIrish journalist shares moving story on day of referendum
Arts and Entertainment
<b>Kathryn Williams</b>
When I was supporting Ray La Montagne I was six months pregnant. He had been touring for a year and he was exhausted and full of the cold. I was feeling motherly, so I would leave presents for him and his band: Tunnock's Tea Cakes, cold remedies and proper tea. Ray seemed painfully shy. He hardly spoke, hardly looked at you in the face. I felt like a dick speaking to him, but said "hi" every day. </p>
He was being courted by the same record company who had signed me and subsequently let me go, and I wanted him to know that there were people around who didn't want anything from him. At the Shepherds Bush Empire in London, on the last night of the tour, Ray stopped in his set to thank me for doing the support. He said I was a really good songwriter and people should buy my stuff. I was taken aback and felt emotionally overwhelmed. Later that year, just before I had my boy Louis, I was l asleep in bed with Radio 4 on when Louis moved around in my belly and woke me up. Ray was doing a session on the World Service. </p>
I really believe that Louis recognised the music from the tour, and when I gave birth to him at home I played Ray's record as something that he would recognise to come into the world with. </p>
booksKathryn Williams explores the works and influences of Sylvia Plath
Liz Kendall played a key role in the introduction of the smoking ban
newsLiz Kendall: profile
Life and Style
techPatent specifies 'anthropomorphic device' to control media devices
The PM proposed 'commonsense restrictions' on migrant benefits
voicesAndrew Grice: Prime Minister can talk 'one nation Conservatism' but putting it into action will be tougher
ebookA unique anthology of reporting and analysis of a crucial period of history
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

Guru Careers: Software Developer / C# Developer

£40-50K: Guru Careers: We are seeking an experienced Software / C# Developer w...

Neil Pavier: Management Accountant

£45,000 - £55,000: Neil Pavier: Are you looking for your next opportunity for ...

Sheridan Maine: Commercial Accountant

£45,000 - £55,000: Sheridan Maine: Are you a newly qualified ACA/ACCA/ACMA qua...

Laura Norton: Project Accountant

£50,000 - £60,000: Laura Norton: Are you looking for an opportunity within a w...

Day In a Page

Sun, sex and an anthropological study: One British academic's summer of hell in Magaluf

Sun, sex and an anthropological study

One academic’s summer of hell in Magaluf
From Shakespeare to Rising Damp... to Vicious

Frances de la Tour's 50-year triumph

'Rising Damp' brought De la Tour such recognition that she could be forgiven if she'd never been able to move on. But at 70, she continues to flourish - and to beguile
'That Whitsun, I was late getting away...'

Ian McMillan on the Whitsun Weddings

This weekend is Whitsun, and while the festival may no longer resonate, Larkin's best-loved poem, lives on - along with the train journey at the heart of it
Kathryn Williams explores the works and influences of Sylvia Plath in a new light

Songs from the bell jar

Kathryn Williams explores the works and influences of Sylvia Plath
How one man's day in high heels showed him that Cannes must change its 'no flats' policy

One man's day in high heels

...showed him that Cannes must change its 'flats' policy
Is a quiet crusade to reform executive pay bearing fruit?

Is a quiet crusade to reform executive pay bearing fruit?

Dominic Rossi of Fidelity says his pressure on business to control rewards is working. But why aren’t other fund managers helping?
The King David Hotel gives precious work to Palestinians - unless peace talks are on

King David Hotel: Palestinians not included

The King David is special to Jerusalem. Nick Kochan checked in and discovered it has some special arrangements, too
More people moving from Australia to New Zealand than in the other direction for first time in 24 years

End of the Aussie brain drain

More people moving from Australia to New Zealand than in the other direction for first time in 24 years
Meditation is touted as a cure for mental instability but can it actually be bad for you?

Can meditation be bad for you?

Researching a mass murder, Dr Miguel Farias discovered that, far from bringing inner peace, meditation can leave devotees in pieces
Eurovision 2015: Australians will be cheering on their first-ever entrant this Saturday

Australia's first-ever Eurovision entrant

Australia, a nation of kitsch-worshippers, has always loved the Eurovision Song Contest. Maggie Alderson says it'll fit in fine
Letterman's final Late Show: Laughter, but no tears, as David takes his bow after 33 years

Laughter, but no tears, as Letterman takes his bow after 33 years

Veteran talkshow host steps down to plaudits from four presidents
Ivor Novello Awards 2015: Hozier wins with anti-Catholic song 'Take Me To Church' as John Whittingdale leads praise for Black Sabbath

Hozier's 'blasphemous' song takes Novello award

Singer joins Ed Sheeran and Clean Bandit in celebration of the best in British and Irish music
Tequila gold rush: The spirit has gone from a cheap shot to a multi-billion pound product

Join the tequila gold rush

The spirit has gone from a cheap shot to a multi-billion pound product
12 best statement wallpapers

12 best statement wallpapers

Make an impact and transform a room with a conversation-starting pattern
Paul Scholes column: Does David De Gea really want to leave Manchester United to fight it out for the No 1 spot at Real Madrid?

Paul Scholes column

Does David De Gea really want to leave Manchester United to fight it out for the No 1 spot at Real Madrid?