February Questions and Answers
Newsletter issue – February 2024
Q. I've just been told I'm being made redundant by my employer, but they have agreed to a significant settlement agreement. My employment will continue for three months and after that they've agreed to pay one month of salary (still on the payroll in that time) and then the equivalent of four months of my salary (tax free), which equates to £32,450. How much in the way of tax will I be hit with?
A: There are a few things to think about here when working out any tax liability in the circumstances of a redundancy payment. Firstly, you'll remain on payroll and work for three months, from what you've said. So, you will carry on paying tax and National Insurance in the usual way on those three months of salary payments. Nothing changes there. That's also the case for the one month of salary at the end of your termination that you mentioned. You'll also pay tax and National Insurance on any holiday pay and bonuses.
You haven't mentioned entering into a restrictive covenant (meaning you can't work for a competitor or have contact with customers for a period of time after you leave). However, if that did apply in your case, tax and NI would also apply to payments you receive for agreeing to enter a restrictive covenant. If you get any payments in lieu of working your notice period, those will also be subject to tax and NI.
Moving on to the 'severance' payment or lump sum (£32,450) that you say your employer has agreed to pay. The good news is that most of this covered by a tax-free amount of £30,000. That figure includes statutory redundancy, additional severance or enhanced redundancy (the bit which is most applicable to you) and other non-cash benefits (for example, a company car) you keep after leaving. So, in your case, only £2,450 will be applicable for taxation.
Q. A business colleague has recently recommended I look into how I set off my trade loss against my general income. This is not something I was aware of previously. I've been trading for six years. I made a loss of £20,000 in the year ending 30/9/22 (my accounts are made up to end of September each year). My total income for 2022-23 was £30k but just £10k in the previous year.
A: You will have options to look at under the Income Tax Act 2007 (ITA 2007). The alternatives, under 64 of the act, allow for the loss of £20k to be relieved. Alternatively, you could choose to set £10k against 2021-22 and £10k against 2022-23.
You could choose to set all your losses of £20k against your whole income for 2022-23. To decide on the best option, let's compare the general income in the year of the loss and preceding year.
Your £10k income for 2021-22 is already covered by the £12,570 tax-free personal allowance. But the general income you had of £30k for the next year is above that same allowance.
So, on that basis you are unlikely to benefit by carrying the £20k loss back to 21-22 - as your income fell below the personal allowance and you had no tax liability for that year. But you could benefit by using the loss against your income for 2022-23 - i.e. against the £30k. You would inevitably lose some of your personal allowance but would have any tax deducted that year either refunded or set off.
We should clarify here also that when we talk about 'general income', that means the whole income for all sources of income chargeable to income tax for the tax year. And it's also important to state there must be no partial claims - any claim must be for the full amount of the loss made.
Q. I'm a resident in England but I'm buying a house in Scotland and will be splitting my time between the two - both in terms of work (where we have a new office opening in Glasgow) and for family time. What are the tax implications, and will I become classified as a Scottish taxpayer?
A: For both Wales and Scotland, there are devolved powers regarding income tax, and this can be a tricky area. In your case, it's not clear exactly how you will divide your time and it sounds like you are not totally sure yourself yet - and things may change during the following tax year, too. However, there are a number of tests to apply here that will help you to understand if you will be counted as a Scottish taxpayer.
HMRC points out that a key test to apply is whether you have a 'close connection' to Scotland. That would mean either you have a single place of residence - and that is located in Scotland.
If, as in your case, someone has more than one place of residence, the 'main place' would be in Scotland “for at least as much of the tax year as it has been in each other part of the UK.”
If the tests above can't determine the answer, then something called 'day counting' applies. It seems that you won't yet know how many days you're going to be in Scotland compared to those in England. However, to illustrate this as clearly as we can, let's look at an example used by ICAS, a global professional membership organisation and business network for Chartered Accountants. They point out that if Mr Smith spends 120 days in Scotland, and 90 days travelling in England, 55 days in Northern Ireland and 100 days travelling in Wales, he is still a Scottish taxpayer, even though he has spent more time outside of Scotland than in it.
The important thing for you to note is that you may need to keep a close, accurate record of where you spend your time day-to-day.
The last thing to mention is that if you are classified as a Scottish taxpayer, that status applies for a whole tax year; you can't be a Scottish taxpayer for part of a tax year.
