On 15 April 2011, I received severance pay of £80,000 equal to my annual salary, but I was surprised that £23,000 was deducted as tax. I was led to believe the first £30,000 would be tax-free and the rest would be taxed at 20%. Can I reclaim the excess tax deducted?
It is likely that the first £30,000 of your severance award was tax-free if it was a genuine redundancy payment. This is not always the case as a number of strict conditions must be met.
In the past when such severance payments were paid after the individual had received their P45 form, a BR (basic rate) tax code was applied to the payment which meant only basic rate tax at 20% was deducted. However, since 6 April 2011 employers are required to apply an OT tax code on a month 1 basis to such severance payments. This means that tax is deducted at the basic, higher, and additional rates without the benefit of personal allowances. The month 1 basis means only 1/12 of the basic rate and higher rate limits for the year are taken into account.
The taxable part of your severance payment (£50,000) would have generated a tax deduction of £23,166 using an OT code as follows…
Basic rate: 35000/12 = 2916.67 x 20% = 583.33
Higher rate: 115,000/12 = 9583.33 x 40% = 3833.33
Additional rate: (50,000-9583.33-2916.67) x 50% = 18,750.00
Total = £23166.66
You can reclaim the excess tax charged in your tax return for 2011/12.
