Our Accountants in Kensington answer your Tax releated questions

As accountants in West London we’re used to clients coming to us with their Tax related issues. Recently a client came to one of our accountants in Kensington with an enquiry about reclaiming excess tax deducted from his severance pay.

On 15th April 2012 the client received severance pay of £80,000 equal to his annual salary; however, £23,000 had been deducted as tax. He believed that too much tax had been deducted as the first £30,000 should have remained tax free while the rest would be taxed at 20%.

We informed him that although it was likely that the first £30,000 was tax free, since the 6th April 2011 employers are now 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 (20%), higher (40%) and additional rates (50%) without the benefit of the 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 his 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% = 3,833.33
Additional rate: (50,000-9583.33-2916.67) x 50% = 18,750.00
Total = £23,166.66

The client could then reclaim any excess tax charge found in the tax return for 2012/13.

Don’t forget that Harnett Accountants in Kensington do offer a free hour no-obligation consultation for all new clients. Alternatively you can add us on Facebook, Twitter, or Google+ or continue to look out for our daily blogs.

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