Redundancy & pension payment

amc1 · 14 July 2017 at 9:38AM

Hi, in March (tax year 16/17) I was made redundant and received a taxable £115k payment in my final pay packet (actually received £145k but the first £30k is not taxable). Via PAYE I have paid 40% tax on this figure.

After advice from my company, my pension provider and speaking to the tax office twice about my plans - In April (tax year 17/18) I used some of my own savings to add to the redundancy figure and paid £115k (I checked this was a permitted amount) into my pension pot.

I then wrote a letter to the tax office to request a rebate of the 40% tax paid on the original £115k. This equates to a refund of £46k.

After a wait of eight weeks I have now received a letter asking me to complete a self-assessment as my earnings for 16/17 were over £100k. I wasn't aware of this requirement and am a bit miffed that I had not been advised about it before but ok I can do this.

But I am now worried about the overall outcome of this. I don't want to end up in the position of having already paid tax and then paying it again when I take it out of the pension.

Am I needlessly worrying or have I done something wrong / been advised incorrectly ?

Thank you.

Spreadsheetman · 14 July 2017 at 9:58AM

Were you using carry-forward pension allowance from the previous 3 years to allow the £115k contribution?

amc1 · 14 July 2017 at 9:59AM

yes, confirmed with the pension provider.

Dazed_and_confused · 14 July 2017 at 10:21AM

Are you sure you've thought this through?

Obviously we can only go off what you have actually posted but it appears that you have confused your tax years.

2016:17 - income exceeds £100,000

2017:18 - pension payment exceeds £100,000

Tax relief for pension payments cannot be carried back so how does the payment you made in 2017:18 affect your tax liability for 2016:17?

If your next post is to tell us your original post was wrong then is it any wonder you've possibly gone wrong because people can only go off what you post, we're not mind readers

.

Your employer (probably) and HMRC (definitely) don't give financial advice so who did you give you advice and did you give them all the pertinent facts?

You do not have to pay tax on your pension when you withdraw it. This can be avoided by only withdrawing an amount upto your personal tax allowance each year (and having no other taxable income). Once you reach state pension age this limits how much you can withdraw without having to pay tax on it as you will likely have £8k+ of state pension income.

Spreadsheetman · 14 July 2017 at 10:35AM

Dazed_and_confused wrote: »

Are you sure you've thought this through?

Obviously we can only go off what you have actually posted but it appears that you have confused your tax years.
....

Oh yes - good spot. That would be very bad if that were the case so the timing of that large pension payment is very important - 5th April and before = good, 6th April and after = bad!

amc1 · 14 July 2017 at 10:38AM

Thanks. My original post was not wrong. And what you have said has confirmed my fears.

I discussed my plans including timescales with work, the pension provider and the tax office twice and not one of them raised this potential issue.

I'm gutted. Are there any options left open to me ?

Linton · 14 July 2017 at 10:47AM

The best you can do is to get tax relief on all of this year's income.

amc1 · 14 July 2017 at 10:50AM

I am now in receipt of another pension which gives me approx £22k a year. Are you saying I should be able to reclaim the £4.4k tax that I will pay this year...

Dazed_and_confused · 14 July 2017 at 11:06AM

Sadly no.

Payments into a SIPP or personal pension should attract basic rate relief at source i.e. the £115k you paid becomes £143k in your pension fund but the only impact this has on your own personal tax position is if you are a higher rate payer. The gross pension amount increases the amount you can pay 20% tax on but if your only income this year is £22k then you won't pay any higher rate tax so there is nothing to come back from HMRC.

Glass half full (1)
the basic rate relief of nearly £30k is better than getting a refund of any PAYE tax you will pay this year.

Glass half full (2)
On £22k you will only pay £2100 tax not £4400

Glass half empty (1)
If you are still getting the £22k pension when you withdraw money from the £115/143k pension pot you will be paying 20% tax on it (or more if large enough amounts are taken out)

Glass half empty (2)
As the £115k payment was made late in the year it is likely HMRC would be unaware your income was going to exceed £100,000 so you will probably fund that when you complete your self assessment tax return that you owe quite a lot of tax for 2016:17. This is because your tax code will have included your personal allowance but if you had income of £122,000 or more in total last year you will lose it all. This will cost you approx £4,400 (£11,000 x 40%).

Glimmer of hope
What date was the £145k (£115k taxable) actually paid?

Linton · 14 July 2017 at 11:21AM

I dont think the OP will get basic relief at source on the £115K or perhaps more likely any given will be rescinded at the end of the tax year - pension payments above the limits dont qualify for tax relief. It wont affect the tax on the £22K pension as that isnt earned income.

amc1 · 14 July 2017 at 11:22AM

My pension provider (which is actually a money purchase occupational scheme which replaced the FS scheme I was in) said they didn't do tax relief at source and only invested the £115,000 they received from me. The £115k was paid to them on 25th April 2017.

Redundancy & pension payment

Comments

Categories

Get our FREE Weekly email full of deals & guides - and it’s spam-free