PILON and Salary Sacrifice

Tinpony

I have been made redundant and was asked by my employer if I wanted to use the salary sacrifice scheme for the settlement balance over £30,000.  The package was roughly £40,000 redundancy plus £18,000 PILON. I decided that I would use the scheme.

Now that everything has been processed, I now find that the salary sacrifice only applies to the actual redundancy payout, and not the PILON which apparently is not eligible.  This was not made clear by my employer, and consequently I have been taxed etc on the £18,000 PILON.  Is my employer right to apply that rule regarding PILON?  If so, could I now pay that amount into my pension directly and recover some of the tax? 

Thanks for any advice.

Dazed_and_C0nfused

Assuming you mean a relief at source contribution then no, there is no direct link between that and your personal income tax liability.

For example if you contributed say £15k then the pension company would add £3,750 in basic rate tax relief, courtesy of HMRC.  Whether you have paid £3,750 in tax is irrelevant.

The gross contribution will increase your basic rate tax band by £18,750 which could save you some personal income tax but it depends on what your total taxes income will be for the current tax year.  If it's say £40k (and you aren't Scottish resident for tax purposes) then it won't save you any income tax at all.  But you would have received the £3,750 on pension tax relief.

Marcon

Tinpony said:

I have been made redundant and was asked by my employer if I wanted to use the salary sacrifice scheme for the settlement balance over £30,000.  The package was roughly £40,000 redundancy plus £18,000 PILON. I decided that I would use the scheme.

Now that everything has been processed, I now find that the salary sacrifice only applies to the actual redundancy payout, and not the PILON which apparently is not eligible.  This was not made clear by my employer, and consequently I have been taxed etc on the £18,000 PILON.  Is my employer right to apply that rule regarding PILON?  If so, could I now pay that amount into my pension directly and recover some of the tax? 

Thanks for any advice.

Sounds as if you are close to breaching the maximum £40K annual allowance in respect of pension payments, or may already have done so if your redundancy of 'roughly £40K' + pension contributions made in the current tax year exceeds £40K.

Not clear if you would be able to benefit from carry forward - depends what earnings you are going to have in the current tax year. See https://www.moneyhelper.org.uk/en/pensions-and-retirement/tax-and-pensions/carry-forward

Linton

To answer your basic question - yes the £18K PILON is regarded as earnings for pension contribution purposes and yes you can contribute it ( actually paying in 80% of the £18K with the missing 20% added by HMRC).  You would claim any higher rate relief from HMRC.

You would need to check with your (ex) employer if you wished to pay it into your company pension.

As the other responders have said you would be subject to the same limitations on the amount you can pay into a pension each year as would apply if it was a normal pension contribution from your wages.

Employers can choose to limit SS to regular pension contributions or make any other restrictions they want.  I would guess that SS for a one-off pension payment would require too much manual admin hassle.