Money Helpdesk: Can I claim back the tax taken from my pay-off for redundancy?

I HAVE recently been made redundant, and, as part of my deal, I was paid 12 weeks' notice, a total of £8,084. As this was the first month of the new tax year £3,078 was deducted from this.

I am now looking for new employment, but the prospects are not looking good. I receive 65 per week Jobseeker's Allow plus 64 per week occupational pension.

Is there any way I can claim part of this money back?

WD Airdrie

Valerie Smart, head of tax at PricewaterhouseCoopers in Edinburgh, writes:

BEFORE any claim for a tax repayment can be made it is necessary firstly to establish whether or not the sum received is taxable. Genuine redundancy payments whether made under statutory or non-statutory rules are only taxable to the extent they exceed 30,000. By contrast payments made under, or as a result of a breach of, a contract of employment are taxable as employment income in full.

Although a payment in lieu of notice sounds as though it falls into this latter category, what a payment is called is not always representative of what it actually is. This needs to be clarified with the former employer.

In this case it sounds as though the employer has decided that the payment is taxable and has deducted PAYE from the payment. The Coding Notice that will have been used to determine the tax deducted will have been issued based on the assumption that the employment would continue for the full tax year.

For example, of the 6,475 personal allowance due to those with income under 100,000, only 1/12th, or 539, will have been allowed in the calculation of the PAYE deducted. This is because the PAYE system works on the basis the allowance is spread over the tax year. If the Notice of Coding also included a restriction for other income such as the pension, it may be that very little of the balance was taxed at 20 per cent and most was taxed at 40 per cent. This could explain why such a high tax charge was levied.

As Jobseeker's Allowance, which is taxable, is being claimed it is not possible to claim a tax repayment immediately. The former employer should have issued a form P45 which should be given to the Jobcentre Plus office and this will initiate the tax repayment at the end of the tax year (or earlier if you stop claiming Jobseeker's Allowance). By the end of the tax year it will be possible to establish exactly what taxable income has arisen in 2010/11 and what allowances and tax rates should have applied to it and the Benefit office will issue a tax repayment if due.

In the meantime, it is still advisable to write to HM Revenue & Customs to advise them of your change of circumstances. If you do find new employment this should speed up obtaining a fresh Notice of Coding which will allow for less tax being deducted from your new earnings.

In your circumstances the PAYE system may not accurately account for the tax due and if appropriate HMC can be asked to issue a self-assessment tax return. Once this has been completed, submitted and processed the tax liability will be adjusted to the actual amount due and any remaining overpayment of tax will be refunded.