Redundancy payment to sipp timing?

philng

I am due to receive a redundancy payment on 20th June of around £90k and intend to set up a sipp with approx £50 k in order to claim back tax relief and then phase drawdown at 10k per year from age 55 which is 3 1/2 years away to age 60 when my company pension kicks in.
I have capacity to pay in the 50k but just checking whether there is any timing issue? That is am I ok to set up the sipp as long as it is in this tax year? I have no intention of working again in this tax year.
Also how do I claim the tax back on the 50k sipp contribution? Do I have to wait until end of tax year?

jamesd

What do you mean by "claim back tax relief"? Do you mean "claim tax relief" or do you mean "claim tax relief for income from previous years" or something else?

It appears that you probably cannot do what you think you can do and get the tax relief that you think you can get.

Pension contributions in each tax year are subject to two different caps:

1. Your own personal contributions are capped at your earned income for the tax year. This would normally mean your pay from 6 April until redundancy. Employer contributions in your name made by an employer by salary sacrifice do not count against this limit, this would often be the case for lump sums from redundancy money but not always. Strictly this isn't a hard cap, you're just not entitled to any tax relief above this level and would have to tell HMRC and repay any relief received above the limit. Some parts of a redundancy payment are earnings and yours is large enough for this to apply to some of yours.

2. All contributions to pensions in your name are subject to a cap of no more than £40,000 a year but unused allowance from the past three years can be used to go above this limit. Employer contributions of all types do count towards this limit.

You can set up the SIPP and make the contributions whenever you like so long as the contribution is made within the tax year you want it in. Can be before or after redundancy.

The limits on contributions normally mean that it is better to ask for the employer to make a payment directly into a pension. that can also save employee and employer NI and some employers would be willing to add in the saved employer NI to boost the value.

In a SIPP the SIPP provider would normally reclaim basic rate tax relief. You can claim the higher rate relief by telling HMRC to the gross amount ending up in the pension after that 25% to allow for 20% basic rate tax is added by the SIPP. Don't have to wait until it's been added, you can calculate it by adding the 25%. No need to wait until the end of the tax year and you don't even have to wait until after the money has been paid in.

philng

My understanding is the excess over the tax free 30k Of 62k will count as income for this tax year in addition to the earnings I will have received April to June of approx 14 k.
I have plenty of unused allowance from last 3 years confirmed by my employer in writing to be able to exceed the 40k allowance.
So I am assuming taking account of the above I am able to contribute 50k to a sipp in this tax year?

philng

Just checked redundancy payments in excess of 30k are classed as earned income. So my understanding seems to be that I can use this to allow a 50k sipp contribution as my total earnings will be around 76k for this tax year.

bigadaj

So long a s you have teh carry forward available which seems to be the case it should be straightforward.

You need to have been a member of a pension scheme for the previous tax years which we assume to be the case, will your employer allow you to contribute into their scheme initially, might be quicker and easier and you should be able to transfer out in future. Teh contribution would then be gross and you wouldn't have to reclaim tax paid.

Alternatively assuming your employer will have paid the tax then you need to make a contribution of 80% of your required contribution as teh scheme will reclaim basic rate tax. You then apply form a refund from Hmrc, this can be by self assessment at the end of teh tax year though there's no reason you can contact them and get a refund more quickly.