Redundancy and Tax

tigerspill

Hi,

I know this is a Pensions forum, but it is the only one I read and see good help and information being given. So am comfortable on this forum.
So apologies that this is not directly pension related.

Anyway, to the question.

It is possible I may get an opportunity to take a voluntary redundancy in the new year - this tax year.

I am trying to understand some of the tax limits and rules.

If my pay to date is £65,000 and I have used my pension annual allowance of £40,000 (I have no carry over) - this in essence means I have earned £25,000 in taxable pay.

If my redundancy is say £140,000 - I believe I can take £30,000 tax free (this is what I am being told by company and union)

So my taxable income for the year is £25,000 plus £110,000 = £135,000.

I believe that when you hit around £123,000 in taxable income, I lose the £11,850 tax free allowance.

So I obviously have to pay tax on this. my question is whether this would be at 20% or 40%?

Browntoa

Are you taking it all this year or only the £30,000 this year and the rest next year , or spreading the rest over several years ?

tigerspill

Browntoa wrote: »

Are you taking it all this year or only the £30,000 this year and the rest next year , or spreading the rest over several years ?

Unfortunately in this scheme it must all be taken at once and not split - hence my problem. The documentation has made this clear.

I am going to try and negotiate staying until April, but no guarantee so am assuming worst/likely tax case where I end up with its all this year

choccielover

It’s at 40%

Dazed_and_confused

If my pay to date is £65,000 and I have used my pension annual allowance of £40,000 (I have no carry over) - this in essence means I have earned £25,000 in taxable pay.

No. It all depends on what type of pension contribution you have made. It is entirely possible to still have taxable income of £65,000 in this situation.

Although you would have a very large basic rate tax band as well.

Dazed_and_confused

I think the answer to your question is 60%.

Although your question is not very clear and you could mean different things so the previous answer of 40% could be correct.

Paul_Herring

ListenToTaxman suggests everything after the first £34,500 will be taxed at 40%.

greenglide

Can you not get your employer to pay some of the redundancy pay into your pension?


Is this covered by the £40,000 limit though, being an employer contribution?

Dazed_and_confused

I was answering this,

I believe that when you hit around £123,000 in taxable income, I lose the £11,850 tax free allowance.

So I obviously have to pay tax on this. my question is whether this would be at 20% or 40%?

Alhough there is currently no formal 60% tax rate the effective tax rate between £100,000 and £123,700 is 60% because you lose the Personal Allowance (on a 2 for 1 basis) and that means additional income is then taxed (at 40%).

If you use listentotaxman and enter £100,000 annual income you get tax of £28,356.

Add £10,000 so annual income is £110,000 and the tax increase to £34,356. An extra £6,000 tax on £10,000 income = 60% :eek:

mark55man

No idea about the technicalities - you need paid for advice for that, but her are things I have seen talked about

What would the penalty be for putting more than £40K into your pension this year - it may be cheaper than the effective 60% + are you sure you have fully used all your allowances

Do you have a tax paying partner you could pay into the pension of and then at least your partner would get some relief - or could you use a different investment (VCT/EIS) where there is an element of tax refund - which you could do anyway but letting the tax tail wag the dog is not always great

otherwise I think you may just have to pay it. when you say £65K ytd does that mean you will be earning more than that each month or is that your predicted salary to redundancy. This close to March and with you normally being paid your notice period in lieu i'm not sure there are many games there

that said this close to March might it just be possible to delay the payment until April when you would have a new set of allowances - I imagine the company is trying to absorb the costs into this FY rather than the next one, but it might be possible

Linton

greenglide wrote: »

Can you not get your employer to pay some of the redundancy pay into your pension?


Is this covered by the £40,000 limit though, being an employer contribution?

Sadly, it is covered by the £40K limit which includes both individual and employer contributions.