Redundancy tax/pensions - please help me understand how it works.

AlabamaW

Hello, 
I''m being made redundant and due a 66K payment (for salary only, nothing for holiday etc).  My employer has given me flexibility as to a leaving date and reducing my hours if needed as long as I go by Jan. My taxable income for the previous year was 41K.

I know the first 30k is tax free. I am trying to work out what tax I would pay and the best time to leave (earlier or later in tax year). Obviously if I stay later I can save as much as possible before I go and benefit from employer pension contributions. But I assume that will mean more of the 66K will be taxed at 40%?
I would like to invest the cash ideally but worried I'm going to pay it all out in tax. I can't make additional contributions to my workplace smart pension but I can to my personal pension with Aviva. They said if get paid the redundancy, and then put for example  £10000 into my pension, they automatically apply tax relief so I'll actually be putting 12500 in my pension. I'll already have paid the 40% tax through PAYE tho I assume. How does that work? 
I'm totally confused how this works and what to do. Can anyone help me understand and/or steer me towards a place to find a reliable tax advisor? 

Thank you. 

Dazed_and_C0nfused

What do expect your taxable income to be in the year to 5 April 2022?

AlabamaW

Hello, it depends when I leave employment which is what I'm trying to decide. I earn 41k a year.  I don't intended to earn any thing until April 2022. 

tacpot12

You haven't been very clear about how the £66K is worked out. It sounds you are saying that the employer is saying it doesn't matter whether you work 10 hrs a week or 40 hrs a week until January, or leave tomorrow, they are only going to pay you £66K. So this could be £35K in salary for working your normal hours until January and £31K in redundancy OR say £8K in salary for working 10 hrs a week until January and £56K in redundancy or £66 K in redundancy if you leave tomorrow. 

If this is the case, it doesn't seem to make a lot of difference in the tax you will pay. You will either pay income tax on the money you receive as salary, or as the money you receive as redundancy (except for the first £30K that is tax free). The difference might be in National Insurance, where you will pay none if you earn less than about £9K in the tax year. But you want to pay enough NI to be ensure that the year counts towards your state pension, unless you already know you have enough years to qualify for a full state pension already.

You shouldn't pay any tax at 40%. Even if you left now and the employer paid you £66K redundancy, £30K is tax free and the rest is added to what you have earned this tax year which will only be about £6K, so the most you will be taxed on is £42K (£6K + £66K - £30K) which doesn't incur 40% tax due to your personal allowance. If you make a pension payment, you will also reduce the tax you have effectively paid as it will be refunded to your pension.

I don't think you need a tax adviser, but I would recommend that you keep asking questions here until you understand the situation. 

AlabamaW

Thank you @tacpot12 that is really helpful. To explain the 66K is a stand alone redundancy payment based on years worked, so my hours worked before I leave won't affect that. I was given three figures - if I left in July, October and Jan. July and October were 66k, jan 68k. My salary will be paid as normal based on my hours worked in addition to this. I have holiday entitlement which I choose to take as holiday not pay. 

If I worked til say October and then took my 66K, then I would have earned around 25k in this financial year. Plus my 36K taxable redundancy. That's 61K so isn't that taxed at 40%?
my thought was if I left earlier I wouldn't have earned as much money salary wise this year so would pay less tax on the redundancy...
Sorry for being thick. I've been reading and still confused..

Dazed_and_C0nfused

If the op had personally paid £10k into a "relief at source" pension then their basic rate band would be increased to £50,200 and no higher rate tax would be payable on total taxable income of £61k.

AlabamaW

Dazed_and_C0nfused said:

If the op had personally paid £10k into a "relief at source" pension then their basic rate band would be increased to £50,200 and no higher rate tax would be payable on total taxable income of £61k.

Hi, sorry could you explain this a bit more? I have a workplace final salary smart pension and also a private pension that automatically applies tax relief. I can't put extra into the workplace one but I can into the personal one. Are you saying if I put 10k in the personal one and earn 21K in the financial year (6 months salary) I will just pay 20% tax on the 56k taxable income? (66k-30k tax free = 36k + 21K for six months salary)

Dazed_and_C0nfused

Yes.

Assuming your adjusted net income is less than £100k then your Personal Allowance is £12,570.

The standard basic rate band is £37,700 but if you pay £10k into a relief at source pension then it will be grossed up to £12,500 with the basic rate tax relief and your basic rate band will be £50,200.

£12,570 + £50,200 = £62,770 before any higher rate tax would be payable.

AlabamaW

Dazed_and_C0nfused said:

Yes.

Assuming your adjusted net income is less than £100k then your Personal Allowance is £12,570.

The standard basic rate band is £37,700 but if you pay £10k into a relief at source pension then it will be grossed up to £12,500 with the basic rate tax relief and your basic rate band will be £50,200.

£12,570 + £50,200 = £62,770 before any higher rate tax would be payable.

Thank you that's very helpful