Avoiding tax on redundancy

kevkj

I am now redundant.
I have earned £,32000 to date.My normal salary is £43,800

I will now receive £68,000 redundancy including PILON and £30.000 tax free next month .I do not plan to work again this tax year.

This will now i assume result in me 40% tax on the additional £38,000 as it will be treated as a one off payment by the tax man

I plan to pay £22,400 into my private pension resulting in a gross payment of £28,000 going in to my pension.

Will i be entitled to another £5600 rebate from the HRMC if all my additional pay (£38,000 is i suspect taxed at %40 ?

[Deleted User]

Not quite. You have earned £32000 and the taxable redundancy payment will take your income to £70000. This means that £25000 is taxable at 40%. To avoid this you need to contribute £20000 (made up to £25000) . You will be entitled to a rebate of £5000.

kevkj

Thanks Purdyoaten2 for the .
Can i summise from your reply i am best only putting 20k net into my pension rather than the £22400 net i planned in your view ?.

I will also be entitled to a 2k HRMC tax rebate

Surely the tax man will not know i dont plan to work again and not give me the allowances immediately resulting in all the 38,000 being taxed at 40%.

[Deleted User]

You have to work on what will be eventual position for this tax year. If you don't work again my calculations will be correct.

However you are also correct in that more tax will be paid initially as the tax tables will 'assume' continued income. To reclaim this additional tax and the £5000 due by way of higher rate relief on your pension contribution (not £2000) you will have to contact HMRC.

I am somewhat out of the loop on the procedure but it could well be that you contact HMRC and explain the above (perhaps some of our HMRC employees on here can elaborate?) but wait until you receive your P45.

kevkj

I have my p45 already but not the redundancy payment,its surprised me as it now doesnt show my earnings in total so far for the tax year.

Dazed_and_confused

Are you s Scottish tax resident? The limit for higher rate tax is lower here (£43k instead of £45k) so you may have more tax payable at 40%.

Don't forget to include any other taxable income in your calculations, employer benefits, pension payments received, savings interest etc.

kevkj

No I am not Scottish I am in England.
I have no other taxable benefits.

Dazed_and_confused

Can i summise from your reply i am best only putting 20k net into my pension rather than the £22400 net i planned in your view ?.

I know this wasn't directed at me but no one on here can say what is best. There is a point at which you will only be able to get basic rate tax relief on your pension contributions and for some that would be the point they think enoughs enough and limit the contribution to that amount.

But others think putting the maximum possible in the pension is a better idea even if some of it will only attract basic rate tax relief.

Basically for 2017:18 anything above £45,000 is taxed at 40% so if you have £70,000 taxable income and pay £25,000 gross pension contribution your basic rate tax band would be increased from £45,000 to £70,000 and you would no longer have any higher rate tax to pay. NB. This assumes all of your income is from your employment, not savings or dividends.

Only you know if that is the best thing to do.