Maximum you can put into Pension To Offset Large Tax Bill - Advice Please

billywhizz1966

My wife was recently made redundant and received a package that included the following

22 days pay - £5k
3 months PILON - 16k

I believe these are all counted as UK earnings so in effect will have earned £21k in 2021/22

She had an AVC in operation she made a pension contribution of circa £4.7k in April so I believed she has circa £16.3k left against which she could offset some of her redundancy. She also has about £10k allowance from not utilising her full £40k annual allowance in the last 3 years

My question is in discussing this with an IFA he has indicated that she can claim tax relief on the full £40k in year allowance plus the unclaimed amount whereas everything I had read and seen suggests it could only be on the balance of what she has earned in 21/22 (i.e.) £16.3k plus £10k b/f amount so a maximum of £26.3k. This will help reduce her tax burden in 2021/22 by a considerable amount as her redundancy payment was very generous   

Of course I hope the IFA is right but some clarity from people who know better than me would be appreciated

billywhizz1966

Since I posted this I have been doing a lot of googling and also rang the tax office re tax paid already this year

As I had calculated she is already owed a tax refund of £4k for what she has paid too much to date in 2021/22 forecasted as being due by March 2022 so a nice little refund coming already

In terms of my wider point on what she can pay in 2022/23  everything I have read suggests she can pay the maximum £40k in for 2021/22. My understanding is that my wife  although being made redundant in April and paid for only for 4 months (having previously earnt £75k per annum all appears irrelevant)  as my research backs up the IFA advice that indicates the redundancy element she got in April 2021 over £30,000 is treated as relevant UK earnings (See definition below which is at least that figure) so it does seem she can claim the balance for 21/22 of unused allowance of circa £35k plus unused allowance from previous years of £10k  

This will help maximise the money into her pension by her writing a cheque for £35k and claiming the necessary tax back (guided by the IFA to allow drawdown over a number of years to make it tax efficient so she doesn't pay 40% on any income taken) and can claim back tax also already paid at 40% 

If anyone could confirm I would really appreciate  

DEFINITION OF UK EARNINGS

In general, redundancy payments are not subject to income tax. However, to the extent that payment exceeds £30,000, they are treated as employment income and chargeable to tax under s.403 of the Income Tax (Earnings and Pensions) Act 2003. The amount above £30,000 is taxed at the employee's marginal rate of tax, ie at the highest rate of tax applicable to the employee in question, as if it were the "top slice" of the employee's income for that tax year.

Grumpy_chap

billywhizz1966 said:

My wife was recently made redundant and received a package that included the following

22 days pay - £5k
3 months PILON - 16k

I believe these are all counted as UK earnings so in effect will have earned £21k in 2021/22

You also need to consider her regular pay this year up until when she was made redundant.
If 22 days pay = £5k, then she is on an annual salary around £60k and up to end December will have worked 9 /12 year = £45k.

Is the 22 days pay = £5k her redundancy pay?  If so, that is exempt from tax.  PILON is taxed in the same way as regular salary.

billywhizz1966

Thanks for your reply. To clarify her salary was around £76k per year

The £5k was 22 days salary of which she paid put almost 85% into an AVC hence using about £4.5k of her yearly allowance,
She was paid PILON of around £16k from which no pension was deducted and not allowed to continue AVC so just tax and her pension started in June which is £36k per annum. 

Her redundancy pay was just over £120k so after tax free amount she was taxed on circa £90k and all this windfall combined is why she has had such a large tax bill to pay which we are seeking to mitigate 

It seems looking at the rules we can use full years allowance of £40k and £10k of her unused allowances from previous 3 years and this will have a really [posuytuve outcome if allowed as IFAS indicates so hence my checking

Hopefully that makes sense      

Grumpy_chap

I still don't understand what the £5k 22 days refers to, but it is probably not important.

billywhizz1966 said:

her salary was around £76k per year

Her redundancy pay was just over £120k so after tax free amount she was taxed on circa £90k and all this windfall combined is why she has had such a large tax bill to pay which we are seeking to mitigate 

Given these figures, it would be well-worth employing an Accountant to give professional advice and taking into account all factors with complete visibility of everything.  That will be far more reliable than any advice from some humble posters on an internet forum with only pieces of the jigsaw.

Dazed_and_C0nfused

^^^^ good suggestion.

This can be a complex area where the full facts are needed and you are somewhat drip feeding information.

The tax relief limit and annual allowance available for pension contributions are two separate limits and the tax position in particular also depends on what method is used to make the contributions.

She may have paid some contributions using net pay whilst employed but could now be using relief at source now if paying direct to a pension provider.

And don't forget you can only ever get tax relief in relation to the the tax year the contributions are paid in.  You probably know that but not everyone does and some posters wishing to use carry forward have thought the tax relief applies to the year the annual allowance is carried forward from

billywhizz1966

The £5k was nearly 3 weeks wages or so but as I say I am taking professional advice from the IFA  and from what I have read everything looks like she can offset and use the full £40k. I was able to get most sorted hence contacting HMRC today and getting the ball rolling with a £4k refund but the pension provides the best way of maximising the tax situation. Just thought some one on here may know definitively or point me in to the correct reference docs  

billywhizz1966

She may have paid some contributions using net pay whilst employed but could now be using relief at source now if paying direct to a pension provider.

That is the case (one was DB but the second is into a private pension). Think I will go with the IFA and his advice as it looks like it will benefit us by circa £12k up to £24k in taken as drawdown over a few years - that is what I am paying him for but was just trying to fully understand myself but thanks  

Dazed_and_C0nfused

Her redundancy pay was just over £120k so after tax free amount she was taxed on circa £90k and all this windfall combined is why she has had such a large tax bill to pay which we are seeking to mitigate 

If her taxable income (irrespective of pension contributions) is going to be £100k or more then she will have to complete a Self Assessment return for 2021:22.

If she receives a provisional repayment of £4k from HMRC she must remember to declare that on the return when she comes to complete it.

billywhizz1966

All answer to query after talking to MAPS having been passed from one advisor to another is the redundancy over £30k counts as UK earnings so we can claim tax relief on the balance on 21/22 (£25k) plus £9k b/f allowance so a £20k gain overall when all the adjustments are made re tax/contributions - glad I checked 

zagfles

Definition of relevant earnings for pension tax relief is here: https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm044100#earnings