tax on redundancy payment

noelphobic

I am considering whether to take a voluntary redundancy offer. I know that the first 30k of any payment is tax free. What rate would the amount in excess of this be taxed at? I don't earn enough to pay higher tax rate but if I got my payment in this financial year the amount over 30k plus my other earnings for the year would possibly take me into the higher earnings bracket. Does this mean that my salary plus the amount over 30k would be treated as earnings and I would then possibly pay 40% tax on part of the redundancy payment?

Assuming that is the case and the high possibility that my earnings after leaving this job will be minimal or non-existent for a while would it make more sense to wait until we're in a new financial year before leaving - obviously assuming my employer agreed to this.

Any answers appreciated.

00ec25

read this from a few days ago - identical question to yours , answer is still the same
https://forums.moneysavingexpert.com/discussion/4277669

xylophone

http://www.hmrc.gov.uk/individuals/redundancy-ee.htm
might help.

noelphobic

00ec25 wrote: »

read this from a few days ago - identical question to yours , answer is still the same
https://forums.moneysavingexpert.com/discussion/4277669

I did see that before I posted but don't think the question is identical. The way I read it the OP on the other thread is already in the higher tax bracket, but I'm not. If the amount of my payment over 30k was taxed at 40% that would mean paying a lot more tax than if it was deducted at 20% and could influence whether or not I take the offer and/or whether I try to leave in April rather than in the present financial year.

noelphobic

xylophone wrote: »

http://www.hmrc.gov.uk/individuals/redundancy-ee.htm
might help.

I looked on the HMRC website yesterday but couldn't find anything that helped, unless I've missed something.

I am working on the assumption that anything over 30k will be treated as earned income and would therefore be taxed at either 20 or 40%. If that is the case then I think it would be best to try to hang on until April. If I do that then even if I do pay some tax at the higher rate I will probably be able to claim some of it back at the end of that tax year if I don't earn much.

Dal_Whinnie

You are basically right, that the excess will be taxable when it is received and will form part of your total taxable income. If this takes you into the 40% tax band then the element over and above this will be taxable at 40%. The 40% band applies fro £34,370 for the current year and basic personal allowance is £8,105. This means that if your income is above c£42,500 (including redundancy payment in excess of £30,000) this tax year and is unlikely to be above that amount next year then you will save tax on the excess amount that would be taxed at 40% this year.
The other advantage of waiting until next tax year is that you will presumably receive an additional 4 months salary.
I am not aware of any changes in tax law coming into effect next tax year that could impact the position but you may need to watch the Chancellors statement in 3 weeks time.

opinions4u

Stick the excess over £30k into pension. Then you get tax relief on it.

noelphobic

opinions4u wrote: »

Stick the excess over £30k into pension. Then you get tax relief on it.

Yes, that is an option but not sure that I could afford to tie it tup given the fact that it may be a long time before I have an income again.

Would it mean that I would not pay any tax on the amount that I put in my pension? I can take my pension in 2 years time anyway if I choose to (at age 55).

xylophone

Would it mean that I would not pay any tax on the amount that I put in my pension? I can take my pension in 2 years time anyway if I choose to (at age 55).

http://www.pensionsadvisoryservice.org.uk/media/151927/pensions%20and%20leaving%20work.pdf

http://www.which.co.uk/money/insurance/guides/redundancy/tax-on-redundancy-payments/

http://www.moneywise.co.uk/work-wages/salary-benefits/six-steps-to-dealing-redundancy