COT3 Agreement Questions

helptips

Good evening everyone.

I'm trying to help my neighbour and friend in her early 50s, who is not very computer literate, hence I'm posting on her behalf.  I really hope some kind soul can give some tips/advice to ease her mind.  Here's her background:

• She had worked for a government organisation for a number of years and had problems at work and was eventually dismissed. 
• She brought tribunal claims against the employer and eventually won it for discrimination and unfair dismissal.  After many months of negotiations, she accepted an offer of £90K.  
• The whole compensation was for "Loss of Office".  Her solicitor told her that they weren't tax experts, so could not give any advice to her.
• When she was dismissed she immediately received paid civil service compensation of £8k, she was told this amount needed to be recouped, so instead her £30 tax-free allowance would be reduced to £22K instead.
• The employer taxed the remainder at 0T Tax code. Hence no personal allowances, but said that she can claim any tax owed back as rebate from HMRC.
• But she's been taxed a whopping £27K instantly and unfortunately feeling pressured, accepted the COT3 without consulting anyone.
• She hasn't been paid as yet because the employer has upto 28 days to make a payment.

Although it might be too late, here's the questions that she has:

1. Since the amount takes her over £50K threshold and she's receiving child benefit for one of her children, would she need to do a self-assessment?
2. My understanding is that she was better rather than paying so much in tax, to payoff a lump sum towards her pension - Am I wrong in that?
3. The COT3 does not include what method the amount will be paid - Only that it will be paid.  But since the agreement has already been signed, she still hasn't received a payment as yet, so can she still ask her employer to instead pay some of the money towards her pension to save her tax and also allow her to bring the amount down to below £50K threshold so that she doesn't have to complete a self-assessment?

Thanks in advance.

Undervalued

As I understand it, only the first £30K of any compensation is tax free. The rest is taxed as earned income as are any other payments made at the same time that were contractual entitlements (e.g unpaid holiday etc).

I would have though there was zero chance of re-negotiating it now. Sorry but she should have taken proper professional advice (both legal and financial) before signing give the amount of money involved.

helptips

Undervalued said:

As I understand it, only the first £30K of any compensation is tax free. The rest is taxed as earned income as are any other payments made at the same time that were contractual entitlements (e.g unpaid holiday etc).

I would have though there was zero chance of re-negotiating it now. Sorry but she should have taken proper professional advice (both legal and financial) before signing give the amount of money involved.

Thanks Undervalued - My understanding is that any money put towards pension is tax-free without limit and the £30k tax free is separate to this.  I agree with what you're saying, but how the money is distributed has not been entered in the COT3 agreement.

Thrugelmir

There's normally an annual ceiling for ad-hoc payments into Government schemes. Still time to open a pension scheme for herself this year. 

helptips

Thrugelmir said:

There's normally an annual ceiling for ad-hoc payments into Government schemes. Still time to open a pension scheme for herself this year. 

Forgive me Thrugelmir, but what does this mean?  Would paying a large portion of the settlement into a pension which subsequently bring it below the £50K threshold mean she would be able to avoid having to complete a self-assessment?

Thrugelmir

helptips said:

Thrugelmir said:

There's normally an annual ceiling for ad-hoc payments into Government schemes. Still time to open a pension scheme for herself this year. 

Forgive me Thrugelmir, but what does this mean?  Would paying a large portion of the settlement into a pension which subsequently bring it below the £50K threshold mean she would be able to avoid having to complete a self-assessment?

Higher rate relief will need to be reclaimed. Won't be automatic. 

helptips

Thrugelmir said:

helptips said:

Thrugelmir said:

There's normally an annual ceiling for ad-hoc payments into Government schemes. Still time to open a pension scheme for herself this year. 

Forgive me Thrugelmir, but what does this mean?  Would paying a large portion of the settlement into a pension which subsequently bring it below the £50K threshold mean she would be able to avoid having to complete a self-assessment?

Higher rate relief will need to be reclaimed. Won't be automatic. 

Right, but in what order would this be done?  Is it after the money is received?  Also how is the higher rate relief (HRR) reclaimed?  Does she, after receiving the compensation, pay a portion straight into her pension and then immediately put a claim in for HRR?

Sorry, for so many questions, but I've never heard of HRR and don't know how the whole process would work.