Redundancy and pension help and avoiding tax

kevkj

Hi
I am being made redundant on 22nd of December 2017

I will be paid PILON up to the end of March 2018.

The total finish figure is £68,350 of which £30,000 will be tax free.

By December my salary earnt for the tax year so far will be will be £33,800.

I am normally a 20% tax payer and obviously want to avoid as much tax as possible at 40%.

The basis seems to be my total income for the year will be £102,150.

I plan to make a £30,000 payment into my pension soon after redundancy .So with tax relief would expect £36,000 to go into my fund.

This is where i get stuck as i have been told with such a big redundancy figure HRMC will tax me automatically at 40% on the whole £63,350.

Is this the case or will they know to automatically make £30,000 of my redundancy tax free ?

Can i anybody tell me how much tax i will pay on my final finishing figure and if i can claim some 40%back as tax relief as i made a big pension payment.

Thanks in advance if it makes sense. Any further advice appreciated.

tacpot12

They (or rather your employer) will automatically know to make £30,000 tax free, so you will be taxed as if you had earned £72,150 or thereabouts. So you will pay some tax at 40%, but will be able to reclaim some of this back via your self assessment return, if you make a large payment into your pension.

If you pay £30,000 into your pension, the pension scheme will claim 20% of the payment you make as tax relief and pay this into your pension, so your pension's value will go up by £30000 * 100 / 80 or £37,500.

You will pay £17,500 in tax and £5000 in NI on an income of £72150. This will leave you with about £49,650 of income after tax. However this is made up of the £33,800 (less tax and NI) that you're already earned this year) and the PILON and any taxable element of the redundancy payment. So I would expect you final payment to be £30000 of tax free redundancy plus about £23000 of taxed income (after tax), so about £53,000.

Hope this makes sense. I've just been plugging your numbers into the tax calculator at https://listentotaxman.com/33800

kevkj

Thanks Tactpot but i assume then im tax free on £30,000 + my 11,500 early tax free allowance.

Hopefully someone will be able to help withe full taxable figures and tax due.

Dazed_and_confused

If you add £30,000 to a SIPP or personal pension the gross contribution would be £37,500 not £36,000.

You don't claim a set amount back in relation to the 40% tax relief, the gross pension contribution increases the amount you can pay 20% tax on, which in turn reduces the amount of 40% tax paid which is how you get the extra tax relief.

As you haven't said where you are resident for tax purposes it's not possible to know how such a pension payment would benefit you tax wise but if you were Scottish resident this would mean (for 2017:18),

£11500 no tax (Personal Allowance)
£60650 x 20% (£34,000 basic rate tax band increased by the gross pension payment)

If you had any other taxable income not previously mentioned such as savings interest then that would potentially change things.

kevkj

Dazed
Sorry to be a pain but i thought tax relief was 20% on £30,000 =£6000.
Obviously i have something wrong could you please explain my error
Sorry again England.Also i do not plan to work again this tax year.

When you say .the gross pension contribution increases the amount you can pay 20% tax on, which in turn reduces the amount of 40% tax paid which is how you get the extra tax relief.

Would i add on £30,000 or £37500 on to the amount i can avoid 40% tax on

Ie £11,500 allowance plus up to possibly £43,000 or whatever the threshold figure is before 40


In essence 43K tax allowance at 20% including 11k tax free allowance. + 30k redundancy tax free +30k in pension so leaving nothing at 40% on earnings of £102,250 total?

kidmugsy

kevkj wrote: »

The basis seems to be my total income for the year will be £102,150.

So if I understand you correctly £30k of that is tax-free, leaving £72,150 exposed to income tax. The threshold for higher rate tax is £45k (or £43k in Scotland). So to avoid that 40% tax you need to make a gross pension contribution for the year of £72,150 - £45,000 = £27,150. You may already have made some pension contribution e.g. through your work: for convenience I'll pretend it's £1,150. Therefore you need to make a further contribution of £27,150 - £1,150 = £26k.

To make a gross contribution of £26k one method is to choose a pension provider and send them a net contribution of £26k x 0.8 =£20,800. They claim £5,200 from HMRC and add it to your pension pot, adding up to £20,800 + £5,200 = £26,000 gross.

Hurray, that's your first step done. Now you want to claim further tax relief, again £5,200, which will be paid to you not the pension provider. One way to do this is to phone HMRC (8.00 a.m.on Saturday morning is said to be a good time) and explain what you've done. You must report your GROSS contribution i.e. the £26k, not the net contribution. They will handle it from there.

kevkj wrote: »

I plan to make a £30,000 payment into my pension soon after redundancy .So with tax relief would expect £36,000 to go into my fund.

Both those numbers are wrong. If all you want to do is avoid higher rate tax a net contribution of £30k is bigger than you need to make. If you did contribute £30k net it would gross up to £37,500.

Dazed_and_confused

Tax relief is 20%, £6000 out of £36000 is only 16.67%

£37500 x 20% = £7500

You add a quarter of your actual payment to get the gross amount.

Jerben

Tax relief is given on the GROSS contribution!
Gross of £37.5k gives tax relief of £7.5k
NET contribution of £30k achieves the above.

kevkj

Kidmugsy Thanks for info i pay 9% into my pension and employer pays 10%. So after 10 months of payments maybe around 8k has been paid this tax year into my works pension.I am paying the £ into my contracted out fund i have had since mid 80s as i can take 25% of this fund next year at 55. Thanks for help all sorry if i am confusing.

kevkj

How do you prove to HRMC the gross amount when you have only paid the net ?

kidmugsy

kevkj wrote: »

How do you prove to HRMC the gross amount when you have only paid the net ?

There's no need: they can do the arithmetic. They'll check what you say when they get the figures from the provider.