Redundancy and Tax

vickk

Hi, I have accepted VR from my company and will leave in May. I have been told that the Taxable part of the redundancy pay will be paid in my final salary at the end of May. For that month my salary will be around £20000 and I assume I will be taxed at 40%.
After that I will either not be working or maybe working part time, if I get a part time job at 12 to £15000 per year will I be taxed at 40% again or will it drop back to 20% for the rest of the year and will I be entitled to a rebate at all

Newbiesw

vickk wrote: »

Hi, I have accepted VR from my company and will leave in May. I have been told that the Taxable part of the redundancy pay will be paid in my final salary at the end of May. For that month my salary will be around £20000 and I assume I will be taxed at 40%.
After that I will either not be working or maybe working part time, if I get a part time job at 12 to £15000 per year will I be taxed at 40% again or will it drop back to 20% for the rest of the year and will I be entitled to a rebate at all

Looks like you've already worked it out for yourself Vickk so if you are just waiting for confirmation, the answer is Yes.
Dependant on the tax codes/bands next year, but if your current tax code is 647L and based on the current rates you could earn just under £44,000 before being eligible for 40% so you would start getting that 40% tax on your redundancy basic when you start work again.

Newbiesw

vickk

Cheers for that but if I get 20 grand in May and then earn no more than 15 in the rest of the tax year then I should not pay 40% at all let alone all year on a low income of 15 grand a year

getmore4less

If this payment include PILON you might be able to negotiate "working" notice since May is far away and getting some of it as part of the tax free lump up to £30k unless you are allready getting that much tax free redundancy anyway

Whats the breakdown of salary redundancy and holiday pay till you leave.


40% tax kick in at over £43875 for 2010-2011

vickk

Hi, I am getting 30K tax free in April and the rest of redundancy is 18K plus holiday pay being paid in my final salary. I will be working my full 12 weeks notice so will not draw any lieu of notice pay

I also have the option of drawing my pension in May at 57 but would lose 4% for each year before 65. If it is going to be taxed at 40% I dont see the point, I might as well leave it and not work either.

getmore4less

Is the pension index linked? How big is it? final salary based?
beware the inflation factor if you don't take it and it gets frozen

Is there a lump sum,

Plans to invest the £30k and any lump sum in a tax efficient way.

2 month into the tax year with April pay and £20k in May leaves plenty(£20k ish) for the rest of the year before 40% tax.

Can you put anything into the pension before May and get it out again.
Some pension schemes you can do this.

vickk

getmore4less wrote: »

2 month into the tax year with April pay and £20k in May leaves plenty(£20k ish) for the rest of the year before 40% tax.

.

Sorry if I dont follow this but if I earn 20k in one month I will get taxed at 40% because of the assumption that I will earn this every month if I then only earn 1k in June will the tax automaticaly drop down to 20% and so on for the rest of the year or will it stay at 40% and will I get a tax rebate in June automaticaly or will I have to claim it at the end of the tax year

Newbiesw

vickk wrote: »

Sorry if I dont follow this but if I earn 20k in one month I will get taxed at 40% because of the assumption that I will earn this every month if I then only earn 1k in June will the tax automaticaly drop down to 20% and so on for the rest of the year or will it stay at 40% and will I get a tax rebate in June automaticaly or will I have to claim it at the end of the tax year

Yes, thats correct...
You know your earnings are going to be down to the 20% but the tax system doesn't.
In May your average earnings will be at least £10,000 per month, that is equivalent to a salary of £120,000 p.a. so DEFINATELY 40%.
From June onwards, your average income will drop each month including the portion of that from the 40 to 20 % and your tax will be adjusted in your favour (refund), this could go on for a few months until ALL of your income falls within the 20% and the 20% diff between the 40% has been refunded to you.
Dependant on your new income you may not even get refunds but will only be paying a minimal amount of tax, but to the same result of having the 20/40 diff refunded to you.

Newbiesw

Stonk

As said already, the situation should remedy itself over the following months, so that by the end of the tax year you will have paid the correct amount of tax. Each month, you pay PAYE on the assumption that you'll continue earning for the remaining months in the tax year pro rata to your earnings so far in the tax year. As you get progressively closer to the end of the tax year, any spikes get ironed away a bit each month.

Having said that, do check in April 2011 that the total gross income and total tax you've paid during the year (see your payslips) correspond correctly according to the tax bands for 2010-2011.

getmore4less

vickk wrote: »

Sorry if I dont follow this but if I earn 20k in one month I will get taxed at 40% because of the assumption that I will earn this every month if I then only earn 1k in June will the tax automaticaly drop down to 20% and so on for the rest of the year or will it stay at 40% and will I get a tax rebate in June automaticaly or will I have to claim it at the end of the tax year

Your employer may tax you at 40% for some of it but you just claim that back by taking a month off.

Don't sign on for a month and put in a P50 and you will get a refund.
Your tax code reset(new P45) for the next job/JSA if you dicide to claim.

http://www.hmrc.gov.uk/incometax/stop-work-refund.htm

http://www.hmrc.gov.uk/pdfs/p50.pdf


If you sign on immediately you can't do this.

vickk

Many thanks for all your help, things are much clearer on the tax front. When I have more details I will have questions on my pension situation but would probably be better put in the pension section.

Briefly to answer previous question it is a final salary scheme, not index linked (rises at discretion of trustees). As of jan I paid in 40 years and reached max benefit if drawn at 65 but 4% reduction per year if taken early.

I have asked for my figures if taken in May and a projection if left till 60 (I will not leave it any later than 60 but unsure if I should take it now)

Rough estimate if taken in May would be 75K tax free and 15k pension or 21k with no lump sum although that is based on figures from 12 months ago so will be higher now.