Individuals who have been made redundant on the back of their employer's insolvency may have paid too much tax on redundancy payments, the Low Incomes Tax Reform Group (LITRG) has warned, and urges employees to submit claims for overpayment of tax.

The LITRG explained that the situation arises when an employer is unable or unwilling to make redundancy payments after becoming insolvent. Employees are then able to claim a protective award from the Redundancy Payments Office (RPO), which will often have had tax deducted when it should not have been. The LITRG says this is because the RPO is not an employer so does not operate a tax code on the payment.

As a result the RPO deducts basic rate tax from the payment, even though the first £30,000 of redundancy payments is usually tax free. LITRG is urging all those who think they have been wrongly taxed on their redundancy repayment to check their accounts and contact HMRC.

Anthony Thomas, chairman of LITRG, said: 'Unfortunately, when HMRC receive information about your redundancy payment from The Insolvency Service or RPO they are unable to identify whether or not any part of this is non-taxable. As a result, HMRC systems treat the full redundancy payment as taxable and include all of it in your P800 Tax Calculation. A solvent employer would normally only report the taxable element of a redundancy payment to HMRC. So even if you have paid too much tax, this will not show on the P800 Tax Calculation.'

Thomas says that HMRC is aware of this issue and has guidance in place on how to correct calculations that include payments from the Insolvency Service with a non-taxable element. However, HMRC will only act if the employee gets in contact, so the LITC is encouraging anyone who has received a redundancy payment from the Insolvency Service to review their tax position to ensure that they have not paid too much tax.