Is a retirement package deemed to be "income" for pension purposes?

MetaPhysical

A question along similar lines was asked recently. bit I am not sure what the answer was?

If I were to get a decent pay off from work and retire early in April/May, is the payoff payment deemed to be "income" so that you can put it into pension fund?

Of course, a payment package has different components.  PILON. holiday pay, remaining salary and bonuses as well as the golden goodbye payment. Are all of these collectively considered "salary" by HMRC so that you can put the lot into your pension.,. assuming you have enough allowance left of course - which I April or May many people would have.

MallyGirl

I expect it would count if it is taxable and goes through your payroll

MetaPhysical

Let's say for example I got paid net £60K payoff end of April, that makes me a higher rate tax payer which I paid tax on.  I will not earn any more money from employment ever again.   I can support myself via other resources for the rest of that tax year.
I put this £60k straight into my pension and immediately get 15k added to make it a £75k pension contribution (yes I know I can claim the other 25% in my TR as well but let's leave that for now)

So I just turned that 60k into (for now) 75k.  What's to then stop me taking out 50270 (i.,e. up to the basic rate band) as an UFLPS next year?  I made a lot of money from that contribution that I then am allowed to take the next tax year?  It almost seems like magic, surely there is a catch?

MetaPhysical

MallyGirl said:

I expect it would count if it is taxable and goes through your payroll

£30k of it is NOT taxable though. The first 30k of a redundancy payment does not attract income tax or NI.  The *whole* of the redundancy payment does not attract NI, only tax above the 30k limit.

Pat38493

If the payoff is in the form of a redundancy payment, then I believe you can use redundancy sacrifice to put it into a pension but the first £30K of it will be tax free, so that first £30K does not count as earned income for this purpose.  (however you may still be able to put some of that 30K into a pension if you can match it with enough previous earned income in the tax year, but you should review pension recycling guidelines).

QrizB

MetaPhysical said:

MallyGirl said:

I expect it would count if it is taxable and goes through your payroll

£30k of it is NOT taxable though. The first 30k of a redundancy payment does not attract income tax or NI.

And that £30k is not "relevant earnings" for pension tax relief purposes.

See eg:

https://www.rossmartin.co.uk/private-client-a-estate-planning/117-income-claims-reliefs/1034-relevant-earnings-for-pensions-purposes

Albermarle

So I just turned that 60k into (for now) 75k.  What's to then stop me taking out 50270 (i.,e. up to the basic rate band) as an UFLPS next year?  I made a lot of money from that contribution that I then am allowed to take the next tax year?  It almost seems like magic, surely there is a catch?

Regardless of any redundancy issues, getting 40% tax relief on pension contributions, and then being able to take 25% tax free and then the rest at 20% is for sure a very good deal. In fact if you can restrict your taxable income to £12,570, you do not pay anything at all. 

Which is why on this forum we almost always advise 40% taxpayers to put as much in their pensions as they can afford.

MetaPhysical

Albermarle said:

So I just turned that 60k into (for now) 75k.  What's to then stop me taking out 50270 (i.,e. up to the basic rate band) as an UFLPS next year?  I made a lot of money from that contribution that I then am allowed to take the next tax year?  It almost seems like magic, surely there is a catch?

Regardless of any redundancy issues, getting 40% tax relief on pension contributions, and then being able to take 25% tax free and then the rest at 20% is for sure a very good deal. In fact if you can restrict your taxable income to £12,570, you do not pay anything at all. 

Which is why on this forum we almost always advise 40% taxpayers to put as much in their pensions as they can afford.

Yes indeed @Albermarle after posting that and upon further thought, what's so different between an employment payoff and any other money?  After all, I can max out my 60k allowance this year from earnings - that only cost me  just over 30k with employer and tax rebate - and I can draw out 50k next year only pay 20% tax on 38k of it.  It's a no brainer if you can afford to do so and forgo the money,

norsefox

MetaPhysical said:

Albermarle said:

So I just turned that 60k into (for now) 75k.  What's to then stop me taking out 50270 (i.,e. up to the basic rate band) as an UFLPS next year?  I made a lot of money from that contribution that I then am allowed to take the next tax year?  It almost seems like magic, surely there is a catch?

Regardless of any redundancy issues, getting 40% tax relief on pension contributions, and then being able to take 25% tax free and then the rest at 20% is for sure a very good deal. In fact if you can restrict your taxable income to £12,570, you do not pay anything at all. 

Which is why on this forum we almost always advise 40% taxpayers to put as much in their pensions as they can afford.

Yes indeed @Albermarle after posting that and upon further thought, what's so different between an employment payoff and any other money?  After all, I can max out my 60k allowance this year from earnings - that only cost me  just over 30k with employer and tax rebate - and I can draw out 50k next year only pay 20% tax on 38k of it.  It's a no brainer if you can afford to do so and forgo the money,

You're right - there isn't.  So long as you have enough relevant earnings, 'where' your money comes from that goes into your SIPP is irrelevant.  That much is true of many transactions - money is fungible.  It has no memory, nor link to any specific transaction.

It's the accounting and bookkeeping that matters.  If you get £30k tax-free redundancy pay, but you've already spent £30k of your normal income on living expenses, HMRC doesn't care how you arrange it - it's what your actual income is that matters.

So long as your income is high enough, the rest is irrelevant.

Albermarle

MetaPhysical said:

Albermarle said:

So I just turned that 60k into (for now) 75k.  What's to then stop me taking out 50270 (i.,e. up to the basic rate band) as an UFLPS next year?  I made a lot of money from that contribution that I then am allowed to take the next tax year?  It almost seems like magic, surely there is a catch?

Regardless of any redundancy issues, getting 40% tax relief on pension contributions, and then being able to take 25% tax free and then the rest at 20% is for sure a very good deal. In fact if you can restrict your taxable income to £12,570, you do not pay anything at all. 

Which is why on this forum we almost always advise 40% taxpayers to put as much in their pensions as they can afford.

Yes indeed @Albermarle after posting that and upon further thought, what's so different between an employment payoff and any other money?  After all, I can max out my 60k allowance this year from earnings - that only cost me  just over 30k with employer and tax rebate - and I can draw out 50k next year only pay 20% tax on 38k of it.  It's a no brainer if you can afford to do so and forgo the money,

One popular strategy for higher earners  is in the last few years of work ( after mortgage paid, kids grown up etc ) is to use savings to top up the pension pot to maximise the 40% tax relief available. Or spend savings and contribute more of your salary. 
Although there are quite a lot of 40% taxpayers ( more very year) most will not pay 40% in retirement so will benefit a lot from this strategy, if they can afford it.

Grumpy_chap

MetaPhysical said:

I put this £60k straight into my pension and immediately get 15k added to make it a £75k pension contribution (yes I know I can claim the other 25% in my TR as well but let's leave that for now)

So I just turned that 60k into (for now) 75k. 

Will you have carry forward available?
If not, the AA is £60k gross contribution limit, not net.


You also need to be clear on timing as you need to have the relevant earnings in the same tax year as the pension contributions.  It is not clear that will be the case if the redundancy income is in next tax year 2024-25) and not working / earned income in next tax year.