Redundancy and Tax

kidmugsy

I think I've heard of employers who are willing to split a redundancy payment over two succeeding tax years, or even three. Worth asking.

Paul_Herring

or even three

.. if they're still around then. May depend on the reason for the redundancy in the first place.

greenglide

The proposed amount is way above the statutory redundancy pay levels so it looks as though the employer isn't planning going away yet but obviously anything can happen over the next two years!

tigerspill

Thanks for all the responses.

One question - I don't quite understand the paying of 60% tax when going over the 123K and losing the tax free allowance. Can anyone break this down so I can understand it better.

Unfortunately the scheme offered this time won't pay over multiple years - this has been made clear. Previous schemes have had this offered, but sadly not this time.

VCTs are something I would consider, but would need to do a lot of research before investing. I believe that you can invest in VCTs for the previous tax year - if so, I could do this next tax year and collect back tax from this year. Is this right? That would give me time to look into this in more detail.

As for paying into my partner's pension - I could definitely do this. But she is a 20% tax payer and I have never got my head around paying additional pension for a BRT - other than the 25% TFLS. After that tax is paid as normal and she has a DB pension that would eat up her income tax free allowance. Though maybe timing plays a part here if she could get the money out tax free over a couple of years when not earning. Might be an option.

I hadn't come across ListenToTaxman before so will take a look at this.

Paul_Herring

I don't quite understand the paying of 60% tax when going over the 123K and losing the tax free allowance.

It's an effective rate of 60% because you're losing the tax free allowance.

See Dazed's post #9 which explains it: https://forums.moneysavingexpert.com/discussion/comment/75099617#Comment_75099617

Berkshire_Beancounter

One question - I don't quite understand the paying of 60% tax when going over the 123K and losing the tax free allowance. Can anyone break this down so I can understand it better.

It's not actually £123k; it's the slice of income between £100,000 and £123,700. Ironically once you get past £123,700 your marginal rate goes back to 40%.

Once your taxable income goes past £100k, your personal allowance is withdrawn at the rate of £1 for every £2 over the £100k.

You are still paying tax on marginal income at 40% on the face of it (the additional rate of 45% kicks in at taxable incomes over £150k); but the withdrawing of the allowances increases the effective rate of tax.

I find it easier to demonstrate in a worked example:

Assume total taxable income of £100,000, personal allowance £11,850 (for simplicity let's assume all earnings, not interest or dividends)
Tax is due on:
20% on £34,500 = £6,900
40% on the remaining £53,650 = £21,460
Total tax paid on £100k is £28,360

Now let's assume income of £105,000.
The personal allowance gets reduced by £2,500 (i.e. by £1 for every £2 over the £100k limit).
So now tax is due on:
20% on £34,500 = £6,900
40% on £61,150* = £24,460
Total tax paid on £105k is £31,360

* The £61,150 is calculated as:
£105,000 total income
Less £9,350 personal allowance - reduced by £2,500 because of the restriction
Less £34,500 chargeable to basic rate tax
Leaves £61,150 chargeable to higher rate tax

So you're paying an extra £3,000 on £5,000 of income - a marginal tax rate of 60%.

Berkshire_Beancounter

tigerspill wrote: »

VCTs are something I would consider, but would need to do a lot of research before investing. I believe that you can invest in VCTs for the previous tax year - if so, I could do this next tax year and collect back tax from this year. Is this right? That would give me time to look into this in more detail.

.

My understanding is that you can only claim tax relief on VCTs made in the current tax year. HMRC manual VCM51030 says
"Relief is given in terms of tax for the year of assessment in which the shares were issued by the VCT. "

For SEIS and EIS investments on the other hand, it is possible to carry back some of the relief to the previous tax year, up to a limit of £100k.

tigerspill

Berkshire_Beancounter wrote: »

It's not actually £123k; it's the slice of income between £100,000 and £123,700. Ironically once you get past £123,700 your marginal rate goes back to 40%.

Once your taxable income goes past £100k, your personal allowance is withdrawn at the rate of £1 for every £2 over the £100k.

You are still paying tax on marginal income at 40% on the face of it (the additional rate of 45% kicks in at taxable incomes over £150k); but the withdrawing of the allowances increases the effective rate of tax.

I find it easier to demonstrate in a worked example:

Assume total taxable income of £100,000, personal allowance £11,850 (for simplicity let's assume all earnings, not interest or dividends)
Tax is due on:
20% on £34,500 = £6,900
40% on the remaining £53,650 = £21,460
Total tax paid on £100k is £28,360

Now let's assume income of £105,000.
The personal allowance gets reduced by £2,500 (i.e. by £1 for every £2 over the £100k limit).
So now tax is due on:
20% on £34,500 = £6,900
40% on £61,150* = £24,460
Total tax paid on £105k is £31,360

* The £61,150 is calculated as:
£105,000 total income
Less £9,350 personal allowance - reduced by £2,500 because of the restriction
Less £34,500 chargeable to basic rate tax
Leaves £61,150 chargeable to higher rate tax

So you're paying an extra £3,000 on £5,000 of income - a marginal tax rate of 60%.

Thanks for this. I will work though the examples to get my head around it.

mark55man

um - your partner can't be 10% tax payer (unless you mean NI only) as the bands are 0% 20% 40% ... unless I haven't been paying attention

tigerspill

mark88man wrote: »

um - your partner can't be 10% tax payer (unless you mean NI only) as the bands are 0% 20% 40% ... unless I haven't been paying attention

Sorry - I mistyped. I meant 20% and gave corrected my post above.