Making sure you are paid in the correct year for PAYE purposes

At the start of every new year we start to deal with payment scheduling issues. Clients who are being terminated may receive a large payment in lieu of notice, holiday pay and/or a settlement in excess of the £30,000 tax free allowance. All are going to be taxable and will, therefore, increase their taxable income for the year.

There are obviously various tax bands and the really nasty one is the fact that taxpayers in the UK lose their personal allowance for every £2 earned over £100,000 until it is all used up. As that income is taxed at 40% and because the reduction in the personal allowance brings more tax into the 20% band, the effective rate of tax on this slice of income is 60%. We, therefore, work with our Clients to legally see if we can reduce taxable income so as to avoid this tax trap. The same point can be made about the £150,000 band currently 45%

It is often possible to persuade a company to put the employee on garden leave for the notice period. This is beneficial as it moves the money for that part of the notice period that falls in the new tax year into that year. Alternatively, we can sometimes arrange for staged payment which can have the same effect.

It should be noted that PAYE is due on the earlier of the due date for payment and the actual date of payment. Therefore, any settlement agreement should be clear as to when the payments are due. We have had experience of a client’s ex-employer paying too early and in the wrong tax year. HMRC caught up with this sometime later as he had paid the tax as if the payment was in the following year. As his settlement agreement made it expressly clear that the payment was to be in the following tax year at least he had a remedy against the Company as it was clearly in breach of contract. However, this isn’t ideal so our advice is to be very nice to payroll and specifically make it clear to them when the payments should be made. This may also involve having to be nice to HR!