Given the current economic picture, redundancy handling is becoming a hot topic. However, one aspect on which many employers and employees fail to focus, until it is too late, is the tax treatment of payments to be made or received in such circumstances. An expression heard regularly by employment lawyers and tax practitioners alike is that an employer has promised an employee a tax free payment of up to 30K on termination of their employment.
Many people wrongly assume that sums of up to £30K can always be paid free of tax to a departing employee. This is, of course, not always the case.
Failure to consider and manage payments in this regard can result in the employer and employee facing an unwanted income tax and NICs bill. A 40% tax payer will have additional tax of £12,000 to pay on £30K as well as £300 of NICs (at 1%) and the employer will face an employer's Class 1 NICs bill (at a rate of 12.8%) of £3840. Failure to consider and manage the application of the tax charge in this situation can be a costly business. Whilst it is possible to include an indemnity in any compromise agreement it is always advisable to consider the tax risk up front and avoid arguing about the position later.
email
home