01 March 2009

Termination payments - tax-free or tax nightmare?

In order to be awarded CPD units you must answer the following five random questions correctly. If you fail the test, please re-read the article before attempting the questions again.

  1. Stuart is 57 and is leaving under a cloud. His employment contract says he is entitled to three months notice (or full pay in lieu - currently £12,000) and to his normal bonus of £5,000 for the last calendar year. His statutory redundancy pay would be £4,500. The company intends to pay him £39,500 to include all of these elements. How much of this is likely to be subject to PAYE?

  2. Sandy is aged 32 and her employment contract says she is entitled to three months notice (or full pay in lieu - currently £12,000) and to her normal bonus of £5,000 for the last calendar year. Her statutory redundancy pay would be £4,500. The company intends to pay her £39,500 to include all of these elements. How much of this is likely to be subject to PAYE?

  3. Marie is the last person on her team to be made redundant. Over the last three years, her former colleagues all got good redundancy packages. At the end of her three months notice period, she has been offered £47,500 which includes the £5,500 statutory redundancy pay she is entitled too under the Employment Rights Act 1996. How much of this is likely to be subject to PAYE?

  4. Elaine is being made redundant. The company have offered her a payment of £47,500. It is accepted that £30,000 can be paid tax free but how much is subject to NIC?

  5. Leon is chief executive of a large organisation. Sadly, he has a heart attack and is forced to retire from work, as the stresses of his role are a health risk. The company pays £300,000 compensation in respect of the termination, which results directly from his illness. How much is taxable?

  6. George is made redundant and part of the termination payment of £25,000 he receives is payment of salary in lieu of his contractual notice period. Will this payment be subject to income tax and NIC?

  7. Which of the following elements of a redundancy package are always exempt from tax? A) An ex-gratia payment; B) Outplacement counselling; C) Pay in lieu of notice; D) Statutory redundancy pay

  8. Arthur has share options in his company that will lapse when he is made redundant at the end of his notice period. He cannot exercise the options but calculates they are worth £30,000. The company has offered him a payment of £6,500 representing statutory redundancy pay and pays him £30,000 to buy out the share options. How much is taxable?

  9. Alison is leaving employment after a disagreement. The company has offered her a payment of £47,500, including £2,500 of holiday pay and £20,000 of contractual pay in lieu of notice. It is taxing the whole payment 'to be on the safe side'. What should she do?

  10. John was made redundant abruptly when his employer simply handed him his P45 and a cheque for £4,500 statutory redundancy pay on the last Friday afternoon in January. With the help of an employment lawyer, John managed to get his former employer to agree to give him £37,500 pay in lieu of three months notice (although this had not been in his employment contract). John's tax code number is 600L and he is expecting the cheque in March. How much will he receive after any deductions?

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