Income Tax on Redundancy Pay

50Twuncle

I may be made redundant in the near future and due to my time served with my employer - am entitled to a considerable sum
How much Income Tax would I have to pay and what about NI ?
I take it that this is counted as "normal income" ?
Does anyone know any legal method of reducing the tax payable - such as putting it into a pension pot ?

sarflee

Usually you only pay tax on the amount above £30000 and no NI is deducted. Bear in mind that part of the payment may be made up of normal pay/payment in lieu of holiday etc and these would have tax and NI deducted at your usual rate.

50Twuncle

Thanks - thats what I assumed re TAX - What about my last question ?

sarflee

The only way I can think of is to have part of it paid as an employer contribution to a pension scheme, however this means you will not receive this amount in hard cash now.

LittleVoice

AVC to pension scheme may be possible.

Can you ask the Fund administrators?

Primrose

It is often possible for any redundancy payment over the £30,000 tax free amount to be paid as an additional voluntary contribution into an occupational or private pension fund to exempt it from tax but I believe it's important that this payment should be made direct by your employer AFTER you have left their employment, otherwise the Revenue regard it as part of your salary and tax it accordingly. Talk to your pension fund administrators as quickly as possible to get their advice. I seem to remember that when I took a similar route the pension trustees asked me to sign a specific document to the effect that this was either an AVC or salary sacrifice. If you take this option, make sure you leave yourself sufficient money to live on until you can find another job as obviously once the money goes into your pension scheme you can't get it back, although depending on your age, if you're 55, or older, there may be some flexibility about drawing part of your pension. Again, it's important to talk to your pension fund administrators to fully understand the rules. If you receive money in lieu of notice, this will also be taxable, as will be any payments you receive in lieu of holiday entitlement not taken. Also I believe it's still the case that if you receive money in lieu of notice you will not be able to claim any jobseekers allowance until after the expiry of the period for which you took money in lieu. So if you were paid 3 months money in lieu of notice, you will not be able to sign up for Jobseekers allowance for the first 3 months of your unemployment.

50Twuncle

Thanks for your advice - I have asked the pension administrators whether they can advise me on saving tax by putting some of my lump sum into my pension - after the redundancy has taken place
The problem is that my employers want an answer from me by Tuesday morning at 10am as to whether I am willing to accept redundancy
I cannot get a response from the pension administrators by then - so, it appears that I will have to reject the offer....
I understand that as the law stands - once a certain amount has been offered - then this amount cannot be reduced and in my case should increase (more service and guaranteed pay rise) - so come 12 months time (or whenever my employers try again) I should be offered even more to leave ?

jamesd

You can ask your employer to pay the amount over 30k into a pension, the one there if they will let you use that, or any other - say Hargreaves Lansdown - if it won't. Also ask them to contribute the employer NI they save by not paying it as wages.

Primrose

As you've got to make a decision quickly and can't contact your administrators by the deadline, your other option, as jamesd has suggested, might be to contact Hargreaves Lansdown in Bristol (the financial firm who deal with ISAs, SIPPS (Self Invested Pension Funds, etc) and talk to them as your other alternative to use up your "Over £30,000" redundancy fund might be to set up a personal pension alongside your occupational one, rather than pay tax on the additional amount if it's a substantial sum. I'm sure Hargreaves Lansdown will have staff working over this week-end as it's the last one before the Tax Year ends and there will probably lots of people taking last-minute action. You'll probably find their phone number on their website (h-l.co.uk). I use this organisation myself and have always found them very efficient and helpful.

Debt_Free_Chick

This point has already been made, but just to put it another way .... yes, you can save tax by putting the excess over £30k into a pension plan, but only at the expense of not receiving any more than £30k. In other words, you have to spend the excess over £30k buying a pension, in order to get the tax gain.

It really depends on what you want. A lower (taxed) lump sum now - or an income from a pension plan at retirement, with no tax now.

Saving in a pension plan should not be a decision made solely on tax issues, not least as you have to tie your money up in pension until retirement and then can only get 25% of its then value as a lump sum - currently tax-free. The balance of the fund must provide an income and you'll pay tax on that. So saving in a pension plan is not "tax free" it's only partly tax-free (if you take a lump sum) and largely tax-deferred.

Think carefully!

jamesd

21Twinkle wrote: »

I understand that as the law stands - once a certain amount has been offered - then this amount cannot be reduced and in my case should increase (more service and guaranteed pay rise) - so come 12 months time (or whenever my employers try again) I should be offered even more to leave ?

That's not necessarily true. Yes, you'll have more time in service and a pay rise, so that will increase it if everything else remains the same.

On the other side, UK government bond - gilt - yields are at unprecedentedly low levels and that means that payouts using those are at higher levels than historically. However, many pension funds are facing an adjustment to these rates that happens in a month or two so it seems that they may have deliberately made the offer just before they would have to offer more. Good timing by them, not such good timing for you.

If the gilt yields rise to levels above the ones they used this time, that may be enough to reduce your actual payment even though you'll have an extra year. My guess is that next year will be the one that gets you the better deal. So long as the UK government continues its policy of buying gilts and reducing their yields you should do better than has normally been the case.

Even that better than has normally been the case is conditional. If you take the money then immediately buy an annuity to provide income, you've just linked yourself to the same gilt rates and won't gain, but will probably lose because your employer is probably offering a slightly higher income than free market annuities. To gain you'd need to use income drawdown for income until the markets recover, then you could buy an annuity at higher gilt yields that will deliver a larger pension income for your money.

It's quite complicated to try to work out what will or won't be best. Having a job during a recession is a good thing, though. Worth keeping.