Receiving holiday pay by most tax efficient method

[geek84]

Good Morning Folks

My fixed term employment contract which was organized via a recruitment agency will be soon coming to an end, and the agency will be paying me holiday money for the days that I was unable to take as annual leave. The lady at the agency said they will pay the holiday money in two instalments because that would be more tax efficient. I forgot to ask her how she worked that out, so would anyone be able to explain how she worked that out?

Thanks

 

[JohnD]

she probably means that (assuming you are going to be unemployed after leaving) there will be another slice of you annual tax-free allowance in the second payment.

Let's suppose your tax-free allowance is £11,000 per year. Each month, the first £916.67 of your earnings will be tax free. So if you get some pay in October, £916.67 will be tax free, and if you get a bit of holiday pay in November, another £916.67 of it will be tax free. If your after-leaving holiday pay is less than £916.67, there will not be any tax deducted.

However, if you then start another job, there will not be any saving to you, because the new employer will have less unused allowance for you.

(calculations rounded for simplicity)

If you are paid weekly, the allowance would be £211 per week.

There are often small under-payments or overpayments during the tax year, whatever doesn't get balanced off during the year will (usually) be carried forward and corrected the following year. Unless they think you have been on the fiddle, when they will try to make you pay it all back.

Your P45 will tell the next employer (or employment office) your earnings and tax paid, year to date, so they can pay the correct amount and balance out any previous over-payment or underpayment of tax. But if you are out of work for a short time, a bit of extra cash in your pocket may be handy.

 

[geek84]

Thanks folks