Income Tax on Redundancy Pay

bob_a_builder

Quote:
Originally Posted by 21Twinkle
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 ?

In understood that question to mean, if I've been offered X today as a redundancy package and if for what ever reason I was not accepted /chosen time time round, next time round - if there is a next time round I couldn't be offered any less than X ( ignore the pension aspect)

I'd like to know the answer to that bit too - true or false ?

50Twuncle

Plus - am I limited to how much I am allowed to put into my pension
ie) If I received say £75k redundancy
Assuming that my allowance is £30k
Do I have to make £45k AVC or am I allowed to put say £25k into it - which would reduce the income tax considerably - and still leave me with a tidy sum....

jamesd

On the upper end you're limited to getting tax relief on 100% of your PAYE income for the tax year in which you make the contribution.

If the company makes the contribution, it isn't limited in that way. That, the employee NI you save and the chance that they will pay in some of the employer NI that they save is why it's better to ask them to pay directly.

On the lower end, you can contribute as little as you like. Just limited by whatever the smallest lump sum contribution the pension you use will allow, usually in the £1,000 to £5,000 range. You're still better off asking the company to pay directly to save the NI.

Assuming you're 50 years or older now, or 55 and older from 2010, remember you can take 25% tax free cash immediately after you make the contribution, if you're using a personal pension. A workplace AVC scheme might have different rules, don't assume, check with it.

Assuming you're over 55, lets say you got £75k. 30k is tax free, leaving 45k to deal with. Say you still had 10k of basic rate income left, that leaves 35k of higher rate income. So you could ask your employer to contribute 35k directly into a pension for you.

If they add the 13% NI that they save that 35k rises to £39,550 without any extra cost to them. Then you immediately take 25% as a tax free lump sum, getting you £9,887.50 and leaving £29,662.50 in the pension.

The 75k has then become:

£39,887.50 tax free cash from the 30k allowance and 25% pension lump sum.
£29,662.50 in the pension to produce an ongoing taxable income.
£10,000 less tax and NI from the basic rate part, about £7k.

Debt_Free_Chick

21Twinkle wrote: »

Plus - am I limited to how much I am allowed to put into my pension

You can not get tax relief on a contribution above your taxable earnings for this year.

Your employer does not have that limit.

The only total overiding limit is a contribution in excess of £200k

Hence ... it is much simpler to get your employer to make a contribution to you pension plan. Then, it's an employer contribution and one you don't need to worry about from a personal tax point of view, unless the total contribution paid to your pension plans this tax year exceeds c£200k

Debt_Free_Chick

jamesd wrote: »

On the upper end you're limited to getting tax relief on 100% of your PAYE income for the tax year in which you make the contribution.

If the company makes the contribution, it isn't limited in that way.

nuff said

But only if the issue is tax!