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PHI Settlement Agrement

gyromain
Posts: 64 Forumite
I am 55 years old
9 years ago Started work at company X
5 years ago Diagnosed with Parkinson disease
2 years ago Long-term sick leave
1.5 years ago - PHI claim accepted insurance company Y
Present
Insurance company Y offers lump sum £150000.
This represents 75% of payments due over the next 5 years.
Company X requires me to sign a Settlement Agreement (new name for Compromise Agreement)
I am trying to understand the financial aspects of accepting this offer.
Apparently the first £30000 is tax free. The rest is taxed at my marginal rate.
I have earn £20000 already in this (13-14) tax year but will not earn anymore.
Can someone work out how much tax I have to pay - using the standard personal allowance?
How much national insurance has to be paid?
And what is the maximum I would be able to put in to a pension and gain tax relief?
Thanks Gyromain
9 years ago Started work at company X
5 years ago Diagnosed with Parkinson disease
2 years ago Long-term sick leave
1.5 years ago - PHI claim accepted insurance company Y
Present
Insurance company Y offers lump sum £150000.
This represents 75% of payments due over the next 5 years.
Company X requires me to sign a Settlement Agreement (new name for Compromise Agreement)
I am trying to understand the financial aspects of accepting this offer.
Apparently the first £30000 is tax free. The rest is taxed at my marginal rate.
I have earn £20000 already in this (13-14) tax year but will not earn anymore.
Can someone work out how much tax I have to pay - using the standard personal allowance?
How much national insurance has to be paid?
And what is the maximum I would be able to put in to a pension and gain tax relief?
Thanks Gyromain
0
Comments
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If i'm understanding your offer correctly, you'll receive a cash sum of £150,000, of which £120,000 is taxable?
You have already earnt £20,000 this year and you don't foresee earning any more (presumably this sum is from working?)
The payout will not require you to pay National Insurance.
The total tax situation this year will be £120,000+£20,000= £140,000
earnings over £118,880 eliminate your personal allowance.
The first £32,010 is taxed at 20%
The remaining £107,990 is taxed at 40%
You can reduce this liability by contributing into a pension. The maximum you can contribute is equal to your earned income (up to £50k per year).0 -
Its standard for a company to pay a contribution towards legal costs when a compromise agreement is under discussion
If you haven't already i would contact some local solicitors with knowledge of these agreements and have it checked over, they may be able to advise (or recommend someone who can) on the financial aspects as well as the legal
Expect to pay a few hundred per hour for a decent solicitor on top of the company contribution, given the value of the agreement its probably worthwhile0 -
The £30000 tax free applies to redundancy situations. For permanent ill health retirement there is (or used to be) a provision for the full amount to be paid tax free. I can't remember the legislation now, or even if it is still in force, but I would suggest that you make enquiries of the inland revenue about this. It always was a little known provision so you may need to do some research.
hth
DI'm a retired employment solicitor. Hopefully some of my comments might be useful, but they are only my opinion and not intended as legal advice.0 -
zzzLazyDaisy wrote: »For permanent ill health retirement there is (or used to be) a provision for the full amount to be paid tax free.
If this still exists, hurray for Daisy. If it doesn't, you could reduce your tax bill if they paid the money over several years, such as the five you mention. I'm not clear about the advantage to you of getting the money as a highly taxed lump sum - is it a case of getting it before you are too ill to enjoy it?Free the dunston one next time too.0 -
What can be counted as earned income that is allowable for tax relief on pension contributions.
1. Salary
2. Overtime
3. Bonus
4. Company sick pay
5. PHI sick pay
6. ESA taxable benefit
7. PHI taxable lump sum
Can I use any salary from previous tax year 12-13 and 11-12?
I think the following Q/A from the HMRC website stops the lump sum being paid tax free.
http://www.hmrc.gov.uk/individuals/taxexemption.htm#17
17. Are the benefits paid to me under my employer's insurance scheme taxable?
Yes. Benefits that come to you from an employer's scheme are treated as part of your earnings, and are taxed in the normal way (but see questions 19 and 20 if you contributed to, or were taxed on, your employer's premiums).0 -
7. PHI taxable lump sum
I wasn't aware of that - so this year you can max out your contribution - £40k from your bank, grossing up to £50k.Can I use any salary from previous tax year 12-13 and 11-12?
'Carry forward' as it's known allows you to mop up any unused pension contribution from the past 3 tax years.
It doesn't matter what you earnings were in those years, it's based on your earnings in this year.
All you need to do (if we agree you've earnt over £50k) is take £150k and deduct contributions you've already made in the past 3 tax years.
You'll probably find you can contribute exactly what you want to.
Remember though, it's your duty to ensure you don't over-contribute, so might be worth speaking to an adviser.0 -
17. Are the benefits paid to me under my employer's insurance scheme taxable?
Yes. Benefits that come to you from an employer's scheme are treated as part of your earnings, and are taxed in the normal way (but see questions 19 and 20 if you contributed to, or were taxed on, your employer's premiums).
This part refers to the PHI payments paid to you through the employers payroll while you are still on the books. It doesn't apply to the settlement lump sum from PHI at the end of employment.
DI'm a retired employment solicitor. Hopefully some of my comments might be useful, but they are only my opinion and not intended as legal advice.0 -
Hi zzzLazyDaisy,
Thanks for all your posts. Are there any examples or regulations on the HMRC website that cover what you said in the your previous post.
Many thanks
Gyromain0
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