Redundancy payment and income tax

Vorsprung_durch_technik

I am currently considering taking voluntary redundancy from a reasonably well paid job to go self-employed.
I would get a decent redundancy payment, but understand that the amount over £30,000 will get taxed at 40% (as I am already a 40% taxpayer on this year's earnings).
It will take a couple of years before my new business will start making money.
Can I get a income tax refund in future if my earnings next year are substantially less?
Alternatively, am I better trying to delay the redundancy payment until after 1 April 2011.

Gertie_Walker

The redundancy payment is taxed in the year it is received. You cannot go back and re-allocate tax bands and allowances.
However, if your new business makes a loss, this can be carried back and relieved against other income for up to 3 years, or for the current year (or carried forwards).

dampsquib

Vorsprung_durch_technik wrote: »

Alternatively, am I better trying to delay the redundancy payment until after 1 April 2011.

Receiving your redundancy money in a new tax year would be a good option, but the payment would need to be received after April 5th - as the new tax year starts on April 6th. You probably wouldn't have to pay quite so much tax at 40% then. When payments are made after someone has left, the employer is instructed to simply deduct tax @ 20% (after giving you credit for the £30,000 tax free allowance). If you didn't have any other income that year, you would eventually get credit for your Personal Tax Allowance too, so would get a refund (less any additional tax due at 40%, if your compensation payment was particularly large).

dori2o

Vorsprung_durch_technik wrote: »

I am currently considering taking voluntary redundancy from a reasonably well paid job to go self-employed.
I would get a decent redundancy payment, but understand that the amount over £30,000 will get taxed at 40% (as I am already a 40% taxpayer on this year's earnings).
It will take a couple of years before my new business will start making money.
Can I get a income tax refund in future if my earnings next year are substantially less?
Alternatively, am I better trying to delay the redundancy payment until after 1 April 2011.

You talk about a new business,willthis be as a sole trader or a limited company?

If it is as a sole trader, you can offset any loss you make in the same year against your other income, thereby reducing your tax liability. You can also carry losses back a maximum of 3 years.