Redundancy: now or in the next FY?

agfoxx

Hi forumites, I'm new here, and I'd be very grateful for advice.
Please don't take this as bragging, and please try and look past the figures, purely at financial implications.
So - here's the deal. I'm about to take voluntary redundancy after having been with my firm for 19 years. They owe me, all-in, £126K in redundancy money.
My current salary is £82K.
I have about 15 days of untaken leave which, if I took the money now, they would have to pay me for. If I stay on until the next FY, I'm supposed to go and actually use my leave. I won't get anything for it.
I can either
a) take the money now - this would allow me to start doing other work from January onwards,
or
b) stay in my current role but on "gardening leave" until the end of the FY, taking redundancy in April 18. The stipulation is that I can't work for competitors while on gardening leave, but I can do other paid work (e.g., teaching etc). I can also continue to collect my salary - as long as I'm available to do some ad hoc jobs as and when my bosses feel they need it.
From a tax perspective, I understand that if I take the money now, this £126K (less the £30K tax free) will be added on to my earnings this year so far - and so a greater percentage of it will be taxed at the higher rate. If I were to take the money next April, I understand that my total earnings would be starting from a clean slate = smaller tax purely on a redundancy but a greater tax on whatever I earn next year. My expectation is that my income next year will be around £60K.
If I took the money in April, I also lose out on the payment in lieu of leave.
Also - this idea of sitting on my hands, at my bosses' beck and call, but with no real job to do, is very frustrating. I've now been doing that for about two months, and I'm finding it really difficult. So I know that, psychologically, I'd much rather cut my ties with the firm now and move on.
But purely from a ***money** perspective, what is the better deal?
Thank you!

kidmugsy

agfoxx wrote: »

From a tax perspective, I understand that if I take the money now, this £126K (less the £30K tax free) will be added on to my earnings this year so far - and so a greater percentage of it will be taxed at the higher rate.

Higher rate? That's not the half of it. You'd have the 60% band too that starts at £100k. You might also have bit at the 45% rate that starts at £150k.

How much unused pension Annual Allowance do you have for 18/19, 15/16, 16/17, and 17/18? That will determine how much tax you can avoid by making a big pension contribution. You should aim to contribute enough to get your taxable income down below £100k, I suggest. Maybe more.

You need to read
https://3652daysblog.wordpress.com/2018/03/05/pension-allowance-taper/

sheramber

You can check the figures here

https://www.income-tax.co.uk/calculator/100000/

agfoxx

Thank you.

Can you please comment on my workings?

Taking the money this year

Salary (gross) this year Apr to Nov: 82/12*8=54.5
Redundancy: 126 less 30 = 96
Expected income in December - March: gross 10K (taking things easy)
Leave comp payment: 4.6K
Total gross income this year: 165.1 net 99
Expected gross income next FY = 60 less tax = 42 net
Net between now and April 2020: 42+ 99 = 141K

Taking the money next year
Salary gross this FY: 82 - tax = net 55 (i.e., staying at work until March, so I will have collected my full salary)
Expected income next year: 60 less tax = net 42
Redundancy; 126 less 30 = 96
So total: 55K net salary this year + 93K (net income next year + net redundancy) = 148

So, looking at my potential earnings between now and April 2020, the difference comes up to £7k.

Is this making any sense?

I did not look into the pension thing at all because understanding tax implications of pensions makes my brain bleed.

Berkshire_Beancounter

Not sure I could follow some of your numbers in how you got to the tax, so I worked it out separately. I'm assuming for the purpose of this that you don't have any other income like bank savings interest, or dividends on shares. I'm also ignoring the impact of pension contributions although your employer ought to have you auto-enrolled into a pension scheme at the very least, unless you opted out. Pension contributions have the effect of reducing your pre-tax income (i.e. tax is calculated on what's left after you've paid into a pension).

I found it easier to set the 'assumptions' out showing gross amounts then calculating the tax as a total, not per each element. In practice that's what HMRC does.

2018/19
Option 1: leave now
Salary - existing job 54.5
Redundancy * 96
Salary - new job 10
Leave comp payment 4.6
Total income 165.1

2019/20
Salary - new job 60
Total income 60

* the redundancy is after the £30k tax free amount

Now, because your income this tax year is over the £150k limit, you have to start paying additional rate tax of 45% on the top slice of income over this; and your personal allowances start to get withdrawn once your income is over £100k. So for 2018/19 you wouldn't have a personal allowance. The allowances and tax bands will also change in 2019/20 compared to this year, but the bit about allowances being withdrawn over £100k and the additional rate tax band starting at £150k stay the same.

The tax is calculated as (all figures rounded to 1 decimal place, in £thousands):

2018/19
Total income 165.1
Personal allowance -
Income chargeable to tax 165.1

2019/20
Total income 60
Personal allowance (12.5)
Income chargeable to tax 47.5

Tax calculation - 2018/19:
First £34,500 @ 20% 6.9
Next £115,500 @ 40% 46.2
Remaining £15,100 @ 45% 6.8
Total tax 60.1

Tax calculation - 2019/20
First £37,500 @ 20% 7.5
Next £10,000 @ 40% 4.0
Total tax 11.5

Total income over the two years is £212.6k
Total tax over the two years is therefore £60.1k + £11.5k = £71.6k
Total net income after tax = £141k

Option 2: stay until the end of the tax year

2018/19

Salary - existing job 82

Total income 82

2019/20
Redundancy 96
Salary - new job 60
Total income 156

The tax is calculated as (all figures rounded to 1 decimal place, in £thousands):

2018/19
Total income 82
Personal allowance (11.85)
Income chargeable to tax 70.15

2019/20
Total income 156
Personal allowance -
Income chargeable to tax 156

Tax calculation - 2018/19:
First £34,500 @ 20% 6.9
Next £35,650 @ 40% 14.3
Total tax 21.2

Tax calculation - 2019/20
First £37,500 @ 20% 7.5
Next £112,500 @ 40% 45.0
Remaining £6,000 at 45% 2.7
Total tax 55.2

Total income over the two years is £238k
Total tax over the two years is therefore £21.2k + £55.2k = £76.4k
Total net income after tax = £161.6k

I don't think you can compare the tax directly in the two years as your income is different - by staying with the current employer for this tax year, you'll be earning more, hence the tax is higher.

If it helps the above calculation shows in option 1 you keep 66.3% of your income (ignoring the redundancy) and in option 2 you keep 67.9% of your income. This is because next year, the tax allowance bands go up so less of your total income is subject to the 45% rate tax.

Did that make sense? (If anyone had any corrections to those figures feel free to point out my errors! )

agfoxx

Wow. Wow. Wow. This is so helpful. And I'm ever so grateful. So basically, this confirms what I sort of suspected, - that I'm better of staying, from a purely financial standpoint.

But thank you. I really, really appreciate you doing this.

Berkshire_Beancounter

agfoxx wrote: »

Wow. Wow. Wow. This is so helpful. And I'm ever so grateful. So basically, this confirms what I sort of suspected, - that I'm better of staying, from a purely financial standpoint.

But thank you. I really, really appreciate you doing this.

Hey, no problem - glad it was some help.

kidmugsy

Berkshire_Beancounter wrote: »

2018/19
Option 1: leave now
Salary - existing job 54.5
Redundancy 96
Salary - new job 10
Leave comp payment 4.6
Total income 165.1



The tax is calculated as (all figures rounded to 1 decimal place, in £thousands):

2018/19
Total income 165.1
Personal allowance -
Income chargeable to tax 165.1


Tax calculation - 2018/19:
First £34,500 @ 20% 6.9
Next £115,500 @ 40% 46.2
Remaining £15,100 @ 45% 6.8
Total tax 60.1

There's your opportunity to avoid the high rates of tax by using pension contributions carried forward from as far back as 15/16. If you can't fathom the calculations see an accountant.[/QUOTE]