Pension payment from redundancy

duggo1

Hi
I hope one of the experts on here can clarify something for me. My husband is a higher rate taxpayer who is about to be made redundant. We anticipate his redundancy payment to be around £45k and plan to put £15k into a pension to avoid paying tax on it. Will this automatically be increased by the normal 20%, and what About the tax relief he can reclaim as a higher rate tax payer. Will he be paid 20% directly through a tax return to do what he wants with it, or does the extra 20% go direct to his pension.
Thanks.

PensionTech

It depends on the type of tax relief arrangement operated by the employer. If it's a "net pay arrangement" then they'll pay the money into the pension scheme before deducting tax, so effectively the 40% relief is received there immediately. If it's a "relief at source" arrangement, which I believe are a bit rarer when it comes to occupational pensions, the payment will be taxed at 40% before being put into the pension, and then the scheme will reclaim 20% and add that to the pension savings - so your husband has to claim the extra 20% via Self Assessment, which he can then use as he pleases.

Best to ask your husband's HR department or whoever is handling the redundancy payments. They should be notified of your husband's intentions anyway as they will need to arrange the payment into the pension scheme.

A simple guide is also available here: https://www.gov.uk/tax-on-your-private-pension/pension-tax-relief

(Note: I've just realised here that you said "a pension" rather than "his pension", so I'm not sure if you're talking about paying it into his occupational pension scheme - if he has one - or into a personal pension for him. If the latter, then he will certainly have to claim the additional 20% via Self Assessment.)

duggo1

Thanks for the detailed reply. He is in a final salary pension, so I think we will have to set up a sip or personal pension for this. Assuming his annual salary was in the region if £50k am I right in thinking that he can then reclaim £3750 to do what he wants with? Seems a no brainer to do this rather than pay 40% tax on the lump sum redundancy.

[Deleted User]

a £45k redundancy payment should be tax free anyway

Spidernick

woodbine wrote: »

a £45k redundancy payment should be tax free anyway

How do you work that out? There's the 'standard' £30K (or what everyone assumes is standard!), but nothing else that I can think of unless you know something I don't and OP's husband worked abroad and is due 'Foreign Service Relief'!

PensionTech

If he is in a final salary pension then he may be able to pay AVCs (additional voluntary contributions - does what it says on the tin) either to increase his service in the scheme or to provide a money purchase benefit on the side of the scheme. The former is good if the additional service is calculated on decent terms; the latter could be particularly good if he is allowed to take his tax-free lump sum from his AVCs first when he comes to retire, meaning that he doesn't have to give up any (or as much) of his final salary pension (on generally fairly poor conversion terms) to get his tax-free lump sum.

duggo1

We shall investigate avc's with his company in the first instance