Offsetting tax on redundancy payout.

Rheumatoid

I wonder if someone might offer some suggestions as to how I can try to offset the tax liability on my redundancy payment and please put me right if I have got things completely wrong.

I am 58 in October

My salary is around £60k gross

I have a DB pension that I am buying added years to conclude February 2020. I understand I can pay these up with a lump sum when I finish work. I will not take my pension until I am 60 and use my SIPP and other savings to fund the gap.

I have been offered redundancy at 30th of September 2019 with a pay out of around £100k

I estimate taxable earnings at 30 September for 2019/20 tax year will probably be about £25k

I have a SIPP that I have taken the 25% from but have not gone into drawdown.

I understand the first £30k of the redundancy payment is tax free so I presume around 18k (to take 25k taxable earnings up to 43k) will be taxed at 21% and the remaining £52k will be taxed at 40%?

As the redundancy payment puts me in to the 40% rate, can I now contribute a large lump sum to my SIPP and get 40% relief or has taking the 25% removed that option?

As I have not contributed to my SIPP this year (and very little in the last 3) might it be possible to use previous years allowance and maybe put the 52k in to my SIPP.

Any other ideas would be welcome.

Thank you.
R.

Dazed_and_confused

If you have any other taxable income (company benefits, savings interest, dividends etc) or there is the possibility of your taxable salary or taxable redundancy payment being a little more than expected then you should read up on Adjusted Net Income as there is a risk you will lose some of your Personal Allowance.

If you are paying 21% tax you cannot pay 40% tax on your earnings (taxable pay or redundancy) it will be 41%. If appropriate though savings interest would be taxed at 40%, not 41%.

Taking the TFLS doesn't prevent you contributing and it doesn't sound like you are limited to £4k either.

You should do some more research into the limits on what you can pay in your specific circumstances. It is quite a confusing area. Maybe post separately on the Pensions board to get a better understanding of what your maximum SIPP contribution could be.

A SIPP contribution that qualifies for tax relief benefits you in two ways. Firstly the pension company, courtesy of HMRC, adds basic rate tax relief. Secondly the gross contribution amount (including the basic rate tax relief) increases the amount of basic rate tax you can pay. Which in turn can reduce the amount of higher rate tax you pay.

Dazed_and_confused

maybe put the 52k in to my SIPP.

Do you you pay £52k which becomes £65k with the 25% uplift?

Or pay £41.6k which becomes £52k with the basic rate relief uplift?

Rheumatoid

Dazed_and_confused wrote: »

Do you you pay £52k which becomes £65k with the 25% uplift?

Or pay £41.6k which becomes £52k with the basic rate relief uplift?

I was thinking of putting the 52k in to become 65k but its only approximate as I may need to hold back some cash for certain purposes.

Dazed_and_confused

Ok, so if we ignore any savings or dividend income which might be taxed at 0% and assume your taxable income is £95k this would mean your basic rate band (in round numbers) would stop at £108k instead of £43k so completely removing you from higher rate tax on these earnings.

But you would only have been paying higher rate tax on c£52k so you wouldn't get higher rate tax relief on the full £65k.

Basically being a higher rate payer doesn't mean you just get an "extra" 21% tax relief on the full £65k (assuming the £65k was eligible for tax relief in the first place).

bigadaj

This could be a little complicated.

You may well have carry forward from previous tax years meaning that you can exceed the £40k maximum annual limit, however you'll need to get your db scheme to calculate how much that element is taking for this and previous years, don't think you can calculate this yourself.

Rheumatoid

bigadaj wrote: »

This could be a little complicated.

You may well have carry forward from previous tax years meaning that you can exceed the £40k maximum annual limit, however you'll need to get your db scheme to calculate how much that element is taking for this and previous years, don't think you can calculate this yourself.

Its looking that way! I will continue to investigate.

intalex

Interesting how someone would end up being taxed 21% or 41%, when the UK tax bands for tax year 19/20 are as follows:

- First £12,500: 0% (personal allowance)
- Next £37,500: 20%
- Next £50,000: 40%
- Next £25,000: 60% (effect of personal allowance erosion)
- Next £25,000: 40%
- Anything above that: 45%

Am I missing something?

ColdIron

Scotland ?

Rheumatoid

intalex wrote: »

Interesting how someone would end up being taxed 21% or 41%, when the UK tax bands for tax year 19/20 are as follows:

- First £12,500: 0% (personal allowance)
- Next £37,500: 20%
- Next £50,000: 40%
- Next £25,000: 60% (effect of personal allowance erosion)
- Next £25,000: 40%
- Anything above that: 45%

Am I missing something?

Probably not. Seems I just had a quick look on google for the bands and may well just have look at Scotland which came up first!

intalex

ColdIron wrote: »

Scotland ?

Wow, had no idea it was different (more!!) that's new learning for me

Just to add one more tier when redundancy comes into play:

- First £30,000 of ex-gratia (i.e. not salary/holiday): 0%
- Next £12,500: 0% (personal allowance)
- Next £37,500: 20%
- Next £50,000: 40%
- Next £25,000: 60% (effect of personal allowance erosion)
- Next £25,000: 40%
- Anything above that: 45%