Redundancy tax

My daughter is being made redundant on the 28th March 2024. Her salary of £60k makes her a 40% tax payer. Her redundancy payment is approx £60k. £30k is tax free and her employer says that she cannot put the extra £30k into her defined contributions pension. Would it be a good move to create a Sipp inside the 2023-2024 tax year and put £20k in? This would then get £5k tax relief added and an ability to claim back a further £5k by self assessment. Thus saving losing £12k tax to HMRC. Her pension payments would not exceed the limit for the year and I realise the money would have to be in the Sipp before April 5th 2024. I look forward to any views you may have. Thankyou. 


  • GrumpyDil
    GrumpyDil Posts: 1,559
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    Have the company confirmed that the payment will be made in the current tax year?

    If so then yes sounds a reasonable plan as long as daughter does not need the money. 
  • Veteransaver
    Veteransaver Posts: 304
    Name Dropper First Post
    If she could get the redundancy payment paid in the next tax year that would be helpful.
    I presume too that it given the sums involved it isn't technically a redundancy but may be via a compromise agreement, which possibly could be paid as £30k redundancy and £30k in the next tax year? Has she got legal advise (often it's paid for by the company) so you can put whatever you want in a compromise agreement basically as long as employer agree to it obviously.
    Also a good tip is if she gets a performance bonus to get that in the compromise agreement too, they don't have to honour but often they do pro rata it. Nothing to lose.
  • Green_hopeful
    Green_hopeful Posts: 592
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    It’s complicated but if she can spare the money she could pay it into a SIPP. 

    You can normally invest up to £60k per year into a pension (there are carry over provisions if she hasn’t maximised her pension contributions in previous years). The pension investment is also subject to a limit of her pay for the year. They don’t include the first £30k tax free. 

    So she could invest £20k or more into her pension and she would get basic tax relief automatically from the SIPP provider. So if she invested £20k the SIPP provider will top that up with £5k tax at source. It takes about 8 weeks to come through to her SIPP and then she will need to invest that £5k too. 

    She can then manually claim the extra tax paid at the 40 percent rate. You have to write to the HMRC with an explanation. There are templates online to copy. She can do this through self assessment if she normally completes a self assessment. I don’t know how long this takes but the HMRC has suggested 2 months so perhaps 3 months is realistic. This money is likely to come through as a cheque. 

    It’s important to think about how she will use the money in her SIPP. She won’t be able to get it out of the SIPP until she is 55. Then if she withdraws it some of it may cause a tax liability on withdrawal. 25 percent can be withdrawn tax free but she should research how she will use it. But it’s probably ok with a relatively small amount. 

    Also the termination payment might not be taxed correctly. If it doesn’t look right she should make an application for an adjustment of the tax paid.  There is an online form for the claim called P50. It takes a bit more than 3 months. This money comes through as a cheque. 

    I set up the SIPP first and paid the money in. I then did the P50 application and then the 40 percent refund. Just waiting on the last application to come back through.

    I found deciding on the SIPP and investments quite tricky but ended up going with Fidelity because I already had a stocks and shares ISA with them. Fidelity have newsletters where it talks about different investments. 
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