All About Tax Rebates and Redundancy

Redundancy often means that you have paid too much in taxes for that year. Most people don’t realise this, meaning that their excess payment may go unreclaimed. Unfortunately, the government doesn’t always spontaneously offer you your money back. Sometimes you have to ask.

Your Tax Code

If, like most people, you pay taxes under the PAYE (Pay As You Earn) system, meaning your income tax and National Insurance contributions are deducted from your salary automatically by your employer and then forwarded to the government, you will be given a tax code at the beginning of the tax year. You should be able to see this tax code on your pay slips. The tax code you are given embodies a prediction about how much you are going to earn in that tax year. Essentially, it is an extrapolation of what you are earning at the beginning. It is simply assumed that you will go on earning at that level. Several things can throw the prediction out of whack, however. One is a promotion accompanied by a significant pay increase; another is redundancy, when your income is dramatically lowered or may even cease altogether.

The reason the prediction matters so much is that income is taxed at different rates depending on how high the overall annual (tax year) income is. Everyone is allowed to earn a certain minimum amount free of any tax. This is known as your “personal allowance”. Above that level of income, the standard 22% tax level kicks in, followed by the 40% level after that.

Your tax code implicitly contains a prediction about how much of your income should be taxed in each tranche. When your income drops off abruptly, therefore, some of what you earned earlier in the year may have been taxed at too high a level.

Situations in Which Your Tax Rebate Will be Handled Automatically

You don’t always need to claim a tax rebate even if you’re entitled to one. There are some situations in which it will be handled automatically for you. For example, if you claim a taxable state benefit after being made redundant, any tax refund you are due will be handled automatically. This is because parts 2 and 3 of your P45 contain the information necessary for the government to see that you are owed a refund. Similarly, if you start a new job shortly after ending your old one, your tax refund will also be processed automatically via the PAYE system with your new employer. All you need to do is hand over your P45 to your new employer in a normal way.

How to Claim a Tax Rebate

If the above situations do not apply and you do not expect to either claim benefits or restart work before the end of the tax year (April 5), you should claim your tax rebate personally. To do this, you will need to get hold of a P50 form from Revenue and Customs (HMRC). It is available for download from their website as a PDF file which you should print out, fill in and post back.

You can claim a tax rebate for up to five years following the January 31 after the year to which your claim relates.

Tax Rebates and Redundancy - Conclusion

When you’ve just been made redundant, you need to watch your finances more closely than ever. So don’t let the taxman get more than he’s due.

The Next Step

Now that you have read through the advice above, you might want to put it into practice. Our Settlement Agreement Checker lets you describe the settlement agreement you have been offered and get guidance on whether it is fair. Find out what you could negotiate for. Try it now →