Tax on Voluntary Severance Payments

spacer_2

Hello,

I have an option to take voluntary severance from my employer up to 31/12/07.

My earnings to this date for tax year 07/08 should be approx £30,000 and I do not plan to work until the new tax year 08/09

My severance payment should be approx £110,000 before tax.

Am I correct in saying that my employer will pay me the first £30,000 of my severance free of tax and then tax the remainder (£80,000) at the basic rate of tax?

If this is correct, I understand I will have an additional higher rate tax liability. Can anyone explain what this liability would be and when I have to pay it to the Inland revenue?

Many Thanks

jamesd

Are you anywhere near retiring? Do you have an ample pension arranged already? If near and more pension is desirable, one possibility to avoid tax is for the employer to pay the higher rate amount directly into a personal pension for you. Assuming that you're over 50 you could then take 25% of this pension sum as a tax free cash payment from the pension and continue with the remainder, either buying an annuity immediately, leaving it invested for a while without drawing on it or starting income drawdown to provide an income immediately.

Is Richardson v Delaney a possible factor in your case? How do your facts compare to the ones there?

Andy_L

£30k is tax free the rest is taxed as income, so in your case

£30k tax free
~£8k at basic rate (this years remaining basic rate allowance)
remaining ~£72k at higer rate (everything that's left)

As I understand it the employer pays the tax direct (assuming you're a PAYE employee)