Future VR payment - Any avenues remaining for reducing tax ?

trust.no.1

Hi Everyone,

I was scratching my head as to whether to post this in the "Redundancy & Redundancy Planning" forum as it seems relevant to both. I've chosen this forum as I'm concentrating mainly on reducing my tax bill if possible.

I haven't needed to submit a tax return for almost 2 decades now ever since HMRC kindly wrote to me and told me I needn't trouble myself with submitting one in the future as my tax affairs were simple.

However I'm in the position where I now know that my employment will cease towards the end of this year. This sad news is slightly tempered by the fact that I will be receiving a VR package of around £83K.

I have estimated that at the time of my departure, I would have earned approximately 30K in taxable pay and would have used up around 23K of next year's 40K annual allowance in terms of my projected employee & employer pension contributions.

I am of course very much interested in reducing my tax liability. I understand that the first 30K of the VR payment is tax free and that the remainder is liable to income tax at my marginal tax rate.

I understand that I can further reduce my tax liability by contributing some of the VR payment into my pension. However, in previous years I have "maxxed" my pension and have used up my 3 year "carry forward" for excess annual allowance. This means I would have only the 17K available of next years annual allowance - and it is my intention to continue working after my current employment ends.

I have read elsewhere on the board that it may be possible to futher reduce one's tax liability by way of charitable donations? I am scratching my head as to how this would work and whether it is applicable in my case.

Would appreciate the thoughts of the board as to whether I have covered all available options as far as reducing my future tax bill.

pphillips

The way charitable donations work is if you make a gift aid declaration, the charity is able to claim back the tax at the basic rate but the charity cannot claim any gift aid at the higher rate.

Self assessed taxpayers can declare the amount they have given to charity in each tax year. This won't affect basic rate taxpayers but higher rate taxpayer effectively get an increased basic rate.

DoctorStrange

Other than your £17k pension contribution I'm not sure you have many other options, and given you plan to continue to work your likely going to fall into the dreaded 60% band on your new employment earnings.

Also, just to clarify a little, it's not always the 'first £30k' that's tax free; only the compensation for loss of office is tax free, up to a max of £30k. That means that any pay in lieu of notice or ex gratia bonus is always taxable.

That may not be relevant in your case but wanted to mention just in case.