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Oddfellow

Can a former employer deduct income tax?

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Hi all

 

Thanks in advance for your collective wisdom.

I am due to be paid a sum of money arising from the sale of patent rights by a previous employer to a third party.

The previous employer is telling me that they are obliged to deduct income tax and NI as it is classified as being earned income. (I'm disputing that classification, but that's another story!).

 

My question is CAN someone who is not currently your employer (or pension provider) deduct income tax and NI? They don't have my current tax code.

 

I thought it was down to them to pay me the full amount and then MY obligation to submit a self-assessment at the end of January next year.

 

Can someone confirm before i sign the document they are asking me to?

 

Cheers!

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Posted (edited)

I don't know the answer for sure but think that whether you are currently employed by them is irrelevant. What matters is if it's income from the period when you were an employee. It's not unusual for an employee to receive income from an employer long after they have left them, eg bonus payments that aren't calculated until the end of the employer's financial year. HMRC will tell them what tax code to use, or they can just use BR and tax it from first £ and leave you to sort it out direct with HMRC later. If they consider it's income from employment and you worked for them as an employee under PAYE I'd say they are obliged to process it as a PAYE payment and deduct the tax and NI. 

 

I'm not an expert though. You could ask HMRC for advice if you can get through to their helpline (good luck with that!)

Edited by Ethel Street

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54 minutes ago, Ethel Street said:

I don't know the answer for sure but think that whether you are currently employed by them is irrelevant. What matters is if it's income from the period when you were an employee. It's not unusual for an employee to receive income from an employer long after they have left them, eg bonus payments that aren't calculated until the end of the employer's financial year. HMRC will tell them what tax code to use, or they can just use BR and tax it from first £ and leave you to sort it out direct with HMRC later. If they consider it's income from employment and you worked for them as an employee under PAYE I'd say they are obliged to process it as a PAYE payment and deduct the tax and NI

 

I'm not an expert though. You could ask HMRC for advice if you can get through to their helpline (good luck with that!)

Thanks Ethel - some useful pointers there. Appreciate you taking the time to respond.

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Hi Oddfellow,

 

When you worked for the employer, I assume you were paid on their PAYE system and they took tax (using the appropriate tax code) and NIC.

 

Is this right or were you treated as self employed.

 

If it's the former then, as Ethel St says, the employer is right to deduct tax using a BR Week/Month 1 code. They must give you a form to confirm the gross pay and deductions which you would declare to HMRC after the relevant year end.

 

If you overpaid tax due to the deductions, you will get it back after your tax return is filed.


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1 hour ago, slick132 said:

Hi Oddfellow,

 

When you worked for the employer, I assume you were paid on their PAYE system and they took tax (using the appropriate tax code) and NIC.

 

Is this right or were you treated as self employed.

 

If it's the former then, as Ethel St says, the employer is right to deduct tax using a BR Week/Month 1 code. They must give you a form to confirm the gross pay and deductions which you would declare to HMRC after the relevant year end.

 

If you overpaid tax due to the deductions, you will get it back after your tax return is filed.

 

Thanks Slick.

 

Yes i was an employee - i left there about 10 years ago. So essentially they dock the tax/NI as if i was paying basic rate with the standard personal allowance, and enter it on a P60?

Slight issue is that (while it isn't an enormous sum) it MAY push me into the 40pc bracket. From reading around a bit, my understanding is that if an additional taxable sum pushes someone over that threshold the WHOLE of the new sum is charged at 40pc. I don't know if that is just until i do a tax return and they recalculate.

The OTHER slight issue is that i assume it will now be paid in tax year 2020-21, meaning that they won't give me a P60 until May 2021. I then submit this in my tax return of January 2022. If it is to be charged at the higher rate (and they deduct at basic rate), i may face a whopping tax bill in April 2022. So i'd better just bank it somewhere, i guess!

 

Thanks again

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Hi OF,

 

Yes, the payment will fall into the 2020/21 tax year that ends 5th April 2021. You have until 31st Jan 2022 to file the necessary tax return online if you have HMRC online access. If filing a paper return, it must be filed by 31st October 2021.

 

You can file the tax return as soon after 5th April 2021 as you like as long as you have the pay and tax info from when the pay't was received. I doubt you'll get a P60 - you may get a payslip or just a letter. Tax should be deducted at the basic rate.

 

If your total pay in the tax year exceeds £50K, you will have to pay tax at the 40% higher rate on the balance over £37,500 (after your £12,500 Personal Allowance).

 

It should be easy to calculate roughly what you need to set aside from the lump sum, ready to pay the HR tax liability. Let us know if you  want help with this.

 

Depending on the amount of your current earnings and the size of the one-off payment, you may also end up underpaying tax on your current salary. Again, we can help you work out what to set aside in anticipation if you know what you expect to earn during the current tax year, subject to complications caused by Covid19.


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That's really helpful - thanks again.

I'm not very happy about the employer's stance on whether it is actually IP income (from the purchaser of the rights) or a payment arising from an agreement between me and my employer, but they assert that the latter is their advised position (issue being that royalties from US patents are not subject to UK income tax).

If anyone has any opinions or expertise on that, i'd welcome your thoughts!

 

Donation forthcoming!

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Hi Oddfellow and many thanks for the Donation - always needed and always appreciated.

 

Your employer is probably following guidance from their accountants about taax treatment.

 

Just shout if you want help working out money to set aside for tax.

 

I hope others will comment if they have useful input about tax treatment of income arising from sale of IP Rights.


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