Settlement Agreement - How to calculate Tax Implications

Smudger78

Hi,
I have been offered a settlement agreement by my employer and due to their enhanced provisions and my length of service and salary it is fairly attractive. That said I am concerned about the timing they are proposing (end Dec) and subsequent tax implications given i am a higher tax rate payer. Given this I am wondering whether it would be beneficial to seek for the settlement payment to be made on 1st April 21  so that it is in a new Tax Year and I can take advantage of my tax free allowance whilst looking for a new role. The details are below, could anyone one with experience/knowledge of this advise whether it will make any difference getting this in this tax year or next and what the likely take home will be after tax/NI?

Severance: £40k (£30k tax free)
PILON: £47k
Total = £87k

Thanks

getmore4less

You missed out earnings to Dec, need those for any tax calculations.

Is any potential new job going to take you into 40% next tax year without any extra?

How long a  period does that PILON cover? 
Could  they do garden leave to push the £10k taxable severance into next tax year

The usual way to mitigate is large(max) pension contributions. 

Smudger78

getmore4less said:

You missed out earnings to Dec, need those for any tax calculations.

Is any potential new job going to take you into 40% next tax year without any extra?

How long a  period does that PILON cover? 
Could  they do garden leave to push the £10k taxable severance into next tax year

The usual way to mitigate is large(max) pension contributions. 

Hi,

Thanks for the reply. Gross earning to date are £38,771  and the PILON actually covers 10 months. I had read about pension contributions being a tax efficient option however I don't want to do this as need the money to live off until I get another job.

Thanks

JCS1

1st April is the current tax year; tax year ends on 5th April.

Grumpy_chap

As well as working out the tax side of things, you need to consider the state of the company.

If the company agreed a delay in making this payment (or some of it) but goes under in the meantime, where will the OP stand?

Even if the OP decides this is a good option and makes a request to the company, it is not guaranteed that the company will agree.

Smudger78

Hi,

The company won’t be going under so no concerns there. In terms of tax year ending 5th April rather than 1st April my mistake although the question remains the same in terms of the benefit of receiving the payment in the next tax year.

getmore4less

You are going to have probably ~20 month net pay and that should last longer if you cut back expenses.

if £47k PILON is 10 months by Dec(9 months) that should be around £42k pay

If you go in Dec you have just under £100k taxable for the year

If  you went garden leave for 3 months that would push ~£43k into next tax year probably saving ~£10k but if you have a new job on similar wages you will end up repaying some of that anyway.

NI will probably be a bit lower on a Dec payout.
 

Smudger78

getmore4less said:

You are going to have probably ~20 month net pay and that should last longer if you cut back expenses.

if £47k PILON is 10 months by Dec(9 months) that should be around £42k pay

If you go in Dec you have just under £100k taxable for the year

If  you went garden leave for 3 months that would push ~£43k into next tax year probably saving ~£10k but if you have a new job on similar wages you will end up repaying some of that anyway.

NI will probably be a bit lower on a Dec payout.
 

Hi,

Thanks for the reply. So if I’m reading this right you are saying if I went on garden leave and took the settlement after 5th April 21 that would potentially save £10k tax if I didn’t get another job that year? I am considering re-training so that could be a possibility you see. Obviously if I did this then my PILON would be 7 months (£33.6k) plus the £39k severance so £69.6k which would effectively be my pay for tax year 21/22. What you’ve said if I am reading it right is exactly why I was considering trying for the extended garden leave but let me know if I’ve got this wrong.

Thanks again.

getmore4less

this is how I worked it out.
Around £43 taxable in April new tax year that would have been 40% if done in this tax year
£10k 40% saved £4k 
£33k 20% saved. £6.6k 
you do pay a bit more NI on the 3months of GL.

Smudger78

getmore4less said:

this is how I worked it out.
Around £43 taxable in April new tax year that would have been 40% if done in this tax year
£10k 40% saved £4k 
£33k 20% saved. £6.6k 
you do pay a bit more NI on the 3months of GL.

Thanks that makes sense, looks like I’ll definitely be better getting the settlement next tax year then....