Minimising tax on redundancy pension payment - July 2023 4 January at 3:02PM in Pensions, annuities & retirement planning 10 replies 628 views

byngga

Hello,

I am due to be made redundant in July 2023.

The package is very generous and comprises of (very roughly) £30,000 tax free lump sum and £50,000 into my company pension fund (which is a defined contribution pension).

I am a basic rate taxpayer and I don't do self-assessment.  My tax is done as PAYE and my pension is contributed monthly 'at-source' from my salary before tax.

My question is this - The £50,000 being paid into my pension will take me above the £40,000 tax-free contribution allowance for the tax year 2023/24.  I have read that this can be 'offset' against the previous 3 tax years where I have not used my full allowance. But does anyone know how this happens in practice?  Will I have to wait till the tax has been taken and then fill in a form to claim it back?  Or will HMRC or my pension provider realise that I've not used my previous allowance and do it all automatically?

Hope that makes sense - I'm not an expert but just hoping someone has some previous knowledge of this.

xylophone

You use the term "at source"but from your description, it appears that in fact tax relief on your pension contributions is given on the "net pay" basis?

Does this indicate that the redundancy  payment into your pension will be made before tax is deducted?

Re "carry forward"

https://www.hl.co.uk/pensions/contributions/carry-forward-rule

http://www.hmrc.gov.uk/tools/annualallowancelimit/

Marcon

byngga said:

Hello,

I am due to be made redundant in July 2023.

The package is very generous and comprises of (very roughly) £30,000 tax free lump sum and £50,000 into my company pension fund (which is a defined contribution pension).

I am a basic rate taxpayer and I don't do self-assessment.  My tax is done as PAYE and my pension is contributed monthly 'at-source' from my salary before tax.

My question is this - The £50,000 being paid into my pension will take me above the £40,000 tax-free contribution allowance for the tax year 2023/24.  I have read that this can be 'offset' against the previous 3 tax years where I have not used my full allowance. But does anyone know how this happens in practice?  Will I have to wait till the tax has been taken and then fill in a form to claim it back?  Or will HMRC or my pension provider realise that I've not used my previous allowance and do it all automatically?

Hope that makes sense - I'm not an expert but just hoping someone has some previous knowledge of this.

Is the £50,000 pension contribution being paid by your employer to your pension scheme? Or are you saying that you will receive £80K redundancy and will make a personal contribution of £50K to your current pension scheme?

xylophone said:

You use the term "at source"but from your description, it appears that in fact tax relief on your pension contributions is given on the "net pay" basis?

I suspect it's salary sacrifice(!), but hopefully OP will be able to confirm if that bit of jargon rings any bells?

xylophone

I suspect it's salary sacrifice(!),

OP, is this as above and your pension contributions are wholly employer contributions?

https://help.accounting.sage.com/en-gb/payroll/automatic-enrolment/salary-sacrifice-pensions.html#:~:text=Salary sacrifice is an arrangement,pay the total pension contributions.

Or net pay?

https://www.aegon.co.uk/news/net-pay-and-relief-at-source.html#:~:text=For the net pay arrangement,income tax has been calculated.

byngga

xylophone said:

I suspect it's salary sacrifice(!),

OP, is this as above and your pension contributions are wholly employer contributions?

Or net pay?

I'm pretty sure it's Salary sacrifice.... that's how it is listed on my payslip. I've not heard the phrase 'net pay' before.

The £50,000 pension contribution will be paid by my employer into my pension scheme. I think we have the option of paying the whole £80,000 into the pension scheme (or any other percentage of the lump sum) but the £50,000 part of the package has definitely got to be paid into the pension and cannot be taken as a lump sum.  The pension part of the package is designed to compensate for loss of pension contributions.

byngga

Does anyone have any further advice on this one? 

I guess what I'm asking, is how do I go about invoking the carry forward to cover the contribution so that I don't exceed the annual allowance.

Is that something I have to ask my pension provider to do or HMRC or do they automatically check previous years when the annual allowance is exceeded?

Secret2ndAccount

You don't have to inform anyone or request anything. First you have to make sure you have enough Carry Forward to cover your contributions. Then you should have sufficient evidence or records to demonstrate your position in the unlikely event of an enquiry.

NedS

Agreed. First check you have enough unused annual allowance from the previous 3 tax years that you can carry forward (there is a calculator on gov.uk website that can perform the calculation for you). If you don't have enough and exceed the allowance, you will incur a tax charge.

It is your responsibility to ensure you pay the right amount of tax, so you should perform the calculations and satisfy yourself either you have not exceeded the annual allowance with carry forward, or that you have exceeded it and have tax to pay. If you have exceeded it, you must complete a self assessment tax return and pay the tax that is due. If you fail to do this, HMRC will come after you for the tax and likely fine you for good measure.

byngga

Great - Thanks for the help.

I have used the HMRC calculator today and it looks like I have enough unused annual allowance to carry forward and cover the sum of money.

So, you're saying I don't need to inform my pension provider or HMRC?

zagfles

byngga said:

Great - Thanks for the help.

I have used the HMRC calculator today and it looks like I have enough unused annual allowance to carry forward and cover the sum of money.

So, you're saying I don't need to inform my pension provider or HMRC?

No. You might get a letter off the pension provider saying you've exceeded the AA but it's just a warning, provided you have enough carry forwards you don't need to do anything, just keep records of your calculations in case HMRC query it (they almost certainly won't).

MazzaMan

If you are sure you won’t exceed the contribution limit including the carry over years don’t worry about it.
I took an early leaver payment of 30k tax free and the rest paid into a DC pension, I received a letter from HMRC I think it was warning me that I’d paid in too much for that year but then never heard anything. I wouldn’t contact anyone if you think you haven’t exceeded the limit.