Tax on redundancy

Mike2527

Posted this on the Redundancy board but no response so thought I would try here.

Hi,

I was informed yesterday that I’m being made redundant at the end of this year.  Fortunately the severance package is sizeable given my tenure and current salary.  That said I need some clarity on my tax liabilities and how to deal with them.  I believe the gross severance payment will be c.£250k and by the end of 2023 my gross pay will be £77k.  It’s unlikely that this will increase come the end of the financial year. 

I know that the first £30k of the severance is not taxed and the remainder at 40% I assume.  That said given my gross pay at the end of 23/24 will be £327k, I’m assuming that there will be other tax liabilities that I’ll need to consider.  

Any thoughts on this and how best to avoid them?  I assume I can pay into my pension & also back date for the last three years? Having said that I will need cash to live on aswell. 

All advice welcome.  Thanks. 

Dazed_and_C0nfused

You will be into 45% (or 47%) tax on a lot of it and will also lose your Personal Allowance.

Pension contributions can no longer be backdated (not for a very long time now) however you may be able to utilise carry forward of unused annual allowance.  

But your very high income could well complicate that.  Definitely research needed.

[Deleted User]

There is no NIC payable on redundancy payments but, if received as part of an overall package, those other elements could well be liable to NIC. (Holiday pay, PILON etc. 

Jeremy535897

Dazed_and_C0nfused said:

You will be into 45% (or 47%) tax on a lot of it and will also lose your Personal Allowance.

Pension contributions can no longer be backdated (not for a very long time now) however you may be able to utilise carry forward of unused annual allowance.  

But your very high income could well complicate that.  Definitely research needed.

If OP is being made redundant later this year why is backdating pension contributions relevant?

[Deleted User]

Jeremy535897 said:

Dazed_and_C0nfused said:

You will be into 45% (or 47%) tax on a lot of it and will also lose your Personal Allowance.

Pension contributions can no longer be backdated (not for a very long time now) however you may be able to utilise carry forward of unused annual allowance.  

But your very high income could well complicate that.  Definitely research needed.

If OP is being made redundant later this year why is backdating pension contributions relevant?

The op queried the possibility in the first post. 

Dazed_and_C0nfused

Jeremy535897 said:

Dazed_and_C0nfused said:

You will be into 45% (or 47%) tax on a lot of it and will also lose your Personal Allowance.

Pension contributions can no longer be backdated (not for a very long time now) however you may be able to utilise carry forward of unused annual allowance.  

But your very high income could well complicate that.  Definitely research needed.

If OP is being made redundant later this year why is backdating pension contributions relevant?

The op said this in their post,

I assume I can pay into my pension & also back date for the last three years? 

Jeremy535897

Yes, I see now. I can't think why it would be relevant as the tax rate will be higher in the current year.

xylophone

however you may be able to utilise carry forward of unused annual allowance.  

But your very high income could well complicate that.  Definitely research needed.


See

https://www.gov.uk/guidance/check-if-you-have-unused-annual-allowances-on-your-pension-savings

Albermarle

Jeremy535897 said:

Yes, I see now. I can't think why it would be relevant as the tax rate will be higher in the current year.

On the pensions board, one of the most common misunderstandings is that you can claim tax relief for previous tax years, which you can not, so I guess D &C was just underlining this point in case the OP had also misunderstood.

OP - Normally the max you can add to a pension in one tax year is £60K ( recently increased from £40K) which includes your contributions, any tax relief and employer contributions. If you did not add £40K in any of the previous 3 years you can carry forward unused allowance to this year.

Separately you can not add more to a pension gross than your gross salary ( regardless of how much unused allowance you have got)

That is the 'normal ' rules but with very high earners there are some restrictions.
Pension contributions for high earners - Nutmeg

Mike2527

Thank you for your responses.

Unfortunately my use of the term ‘backdated’ was incorrect.  I was referring to any unused allowance on this and the last couple of years. 

As of yesterday it looks as though my redundancy will be delayed until the end of April and therefore paid in the 24/25 tax year.   If this is the case I want to explore whether I should ask my employer to pay part of the redundancy into my pension ie circa £60k.  I’m not sure if this feasible but I want to look at the best way of managing the tax liabilities once the redundancy is finalised.  

Comments welcome. 

Jeremy535897

You should not normally be liable to class 1 NIC on redundancy above the £30,000 tax free amount, so you can choose to pay pension contributions yourself. Regarding tapered allowance, see:
https://www.moneyhelper.org.uk/en/pensions-and-retirement/tax-and-pensions/tapered-annual-allowance