Trying to reduce tax from redundancy

imfinished

Hi all,

On Friday I'm being made redundant and trying to work out the best way to reduce tax liability. My employer says that they will pay redundancy the month after I leave , so that makes it end of March (shame it can't be April!!).
I'm a 40% tax payer already.

Redundancy package is made up as follows:
Redundancy £23k
PILON £15k
Enhancement (accept redundancy with a week) £3k
Holiday pay £1k
Knowledge transfer payment £2k
Total £44k

I been told that my PILON status is as follows "You do not have a PILON clause in your contract of employment so your PILON payment will not be paid subject to deductions for tax and NI unless it, along with other severance payments, exceeds the tax-free allowance. Any amount of the severance payments over £30,000 will be taxable."
So my understanding is that there is £14k subject to tax, which at 40% is £5,600.

What is the best option to reduce this amount ? Pension? If so how much ? When do I have to pay it ? Although I don't have another job (yet) I can afford to put all the £14k into a pension

I have a money purchase pension through the company.

Regards
I'm Finished

dori2o

imfinished wrote: »

Hi all,

On Friday I'm being made redundant and trying to work out the best way to reduce tax liability. My employer says that they will pay redundancy the month after I leave , so that makes it end of March (shame it can't be April!!).
I'm a 40% tax payer already.

Redundancy package is made up as follows:
Redundancy £23k
PILON £15k
Enhancement (accept redundancy with a week) £3k
Holiday pay £1k
Knowledge transfer payment £2k
Total £44k

I been told that my PILON status is as follows "You do not have a PILON clause in your contract of employment so your PILON payment will not be paid subject to deductions for tax and NI unless it, along with other severance payments, exceeds the tax-free allowance. Any amount of the severance payments over £30,000 will be taxable."
So my understanding is that there is £14k subject to tax, which at 40% is £5,600.

What is the best option to reduce this amount ? Pension? If so how much ? When do I have to pay it ? Although I don't have another job (yet) I can afford to put all the £14k into a pension

I have a money purchase pension through the company.

Regards
I'm Finished

It depends on what you want to do with the money.

If the only basis you are working on is how to pay no tax at all on the £14k then the easiest way to do this is to pay £14k into your pension.

Ask your former employers payroll if they can do it directly from your payment rather than having to claim the tax back after the year end.

If you want to reduce the tax but retain some of the money for savings/spending,then you would need to calculate howmuch ideally you want to have in cash terms and then work out how much to put into the pension to ensure you have that amount remaining.

Don't forget that if your former employers payroll cannot increase the contribution to your pension directly through the payroll then you will have to suffer the tax when the money is paid, and then ensure that you pay whatever it is you are paying into the pension on or before 5 April. If you do it any later you wouldn't be able to claim the relief in 2015/16 as there is no longer any ability to carry back pension contributions to a previous year.

getmore4less

It might be worth putting the PILON in a pension just in case HMRC decide it is taxable.

Knowledge transfer payment whats that? (is it taxable?)

If the company is sure the PILON can be paid tax free(don't tell them they can keep the tax themselves and pay you net) then pension for the surplus

You don't have to wait you can do the pension now if you have the cash lying around.

imfinished

Thank you both for the replies...

Knowledge Transfer Payment - Yes it's taxable. My skills are key and therefore I've had to undergo an indepth skills transfer to another member of staff.

If I put £14k into the pension do I get 40% of that back as tax relief ?

I don't have the money to hand so I will need to speak to payroll - so that answers one part of my question.

[Deleted User]

If you transfer £14000 to you pension plan, £3500 will be claimed by the provider to ADD TO THIS. Your plan will have a value at this point of £17500. As a 40% tax payer you can claim the additional 20% relief on the £17500 (£3500) by a claim or under self-assessment. You would have to have paid £17500 at the 40% rate to receive the full £3500.

dori2o

[Deleted User] wrote:

If you transfer £14000 to you pension plan, £3500 will be claimed by the provider to ADD TO THIS. Your plan will have a value at this point of £17500. As a 40% tax payer you can claim the additional 20% relief on the £17500 (£3500) by a claim or under self-assessment. You would have to have paid £17500 at the 40% rate to receive the full £3500.

***Just to add to this.

If you personally make the transfer to the pension, i.e. make the contribution direct to them after tax deducted from your money, then you will need to make the claim for tax relief yourself in order to claim back the additional tax you have paid above the 20% which is claimed back by the pension provider.

You can do this over the telephone.

BUT... If you can get the amount transferred in by payroll, and your pension contributions are taken prior to the deduction of tax from your salary, then you will receive the benefit of all the tax relief that is due and won't have to make the seperate claim.

Assuming the amount is £14k, f you were to ask the payroll to transfer £11,200 into the pension and they are able to do this, then you would receive all the tax relief that is die on £14k pension contribution.

Effectively it would reduce your taxable income from this payment by £14k.