Pension tax relief with redundancy money

mordac

I am being made redundant at the end of March. I have also decided to retire at the same time and not look for another job. I'll get about £60k redundancy. I know I can get £30k of that tax-free. I have the option to have the remaining £30k paid into the company defined contriution pension. I'm a higher-rate taxpayer and previous pension contribution have been tax-free at source. However, the payment of the redundancy funds into my pension won't happen until sometime in May, in the new tax year, when my income will be much lower. My question: will the payment int my pension still be tax-free?

Dazed_and_C0nfused

mordac said:

I am being made redundant at the end of March. I have also decided to retire at the same time and not look for another job. I'll get about £60k redundancy. I know I can get £30k of that tax-free. I have the option to have the remaining £30k paid into the company defined contriution pension. I'm a higher-rate taxpayer and previous pension contribution have been tax-free at source. However, the payment of the redundancy funds into my pension won't happen until sometime in May, in the new tax year, when my income will be much lower. My question: will the payment int my pension still be tax-free?

You don't pay tax on pension contributions.

Do you really mean will you be eligible for tax relief on the contribution 🤔

If that is your question then what (taxable) earnings or self employment profits do you expect to have in the 2024-25 tax year?

xylophone

I have also decided to retire at the same time and not look for another job.

Are you saying that you will have no "relevant earnings" in 2024/5?

https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm044100

How old are you?

Marcon

mordac said:

I am being made redundant at the end of March. I have also decided to retire at the same time and not look for another job. I'll get about £60k redundancy. I know I can get £30k of that tax-free. I have the option to have the remaining £30k paid into the company defined contriution pension. I'm a higher-rate taxpayer and previous pension contribution have been tax-free at source. However, the payment of the redundancy funds into my pension won't happen until sometime in May, in the new tax year, when my income will be much lower. My question: will the payment int my pension still be tax-free?

If you're being made redundant at the end of March, then query with your employer why the £30K can't be paid into the company's pension scheme at the time of your redundancy.

zagfles

So your employer is paying the redundancy direct into the pension? If so it's unlikely to make any difference wrt tax or pension limits whether the payment is made this tax year or next (it can do if you have been/intend to max out the AA but doubt that applies does it?). What is it you're worried about? 

zagfles

xylophone said:

I have also decided to retire at the same time and not look for another job.

Are you saying that you will have no "relevant earnings" in 2024/5?

https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm044100

How old are you?

As it says in that link, redundancy above the tax free £30k is relevant earnings. 

mordac

zagfles said:

So your employer is paying the redundancy direct into the pension? If so it's unlikely to make any difference wrt tax or pension limits whether the payment is made this tax year or next (it can do if you have been/intend to max out the AA but doubt that applies does it?). What is it you're worried about? 

Tax relief is added by my employer at source (rather than added by the pension fund or by me claiming it back). If the £30k is paid in the new tax year, when my earnings will be uncertain at best and potentially zero, then I may fall foul of the rule that says the annual allowance for pension contributions is the lowest of $60k or 100% of your earnings.

Albermarle

mordac said:

zagfles said:

So your employer is paying the redundancy direct into the pension? If so it's unlikely to make any difference wrt tax or pension limits whether the payment is made this tax year or next (it can do if you have been/intend to max out the AA but doubt that applies does it?). What is it you're worried about? 

Tax relief is added by my employer at source (rather than added by the pension fund or by me claiming it back). If the £30k is paid in the new tax year, when my earnings will be uncertain at best and potentially zero, then I may fall foul of the rule that says the annual allowance for pension contributions is the lowest of $60k or 100% of your earnings.

Tax relief is never added at source. Do you mean your pension contributions are taken from your salary before tax ( so you never pay tax on them in the first place)?
Anyway if you have £30K paid in the same way in May, you will get the whole £30K paid direct into your pension, whereas if you were paid it directly it would be taxed.

xylophone

https://www.moneyhelper.org.uk/en/work/losing-your-job/your-pension-options-if-you-re-made-redundant



Presumably the OP means that his employer uses "net pay"? 

https://www.litrg.org.uk/pensions/paying-pensions/tax-relief-pension-contributions#:~:text=If your pension scheme uses,by reducing your taxable earnings.


 He says that his redundancy money will be paid in May (rather than with his last salary for the tax year (end March or possibly pre tax year end in April)?

If the £30,000 that is taxable is "relevant earnings" and "net pay" is used

https://www.litrg.org.uk/working/employment/leaving-job/redundancy#:~:text=If your redundancy payment is,to tax/NIC as normal.

then presumably a pay slip will be issued showing no taxable income?

zagfles

mordac said:

zagfles said:

So your employer is paying the redundancy direct into the pension? If so it's unlikely to make any difference wrt tax or pension limits whether the payment is made this tax year or next (it can do if you have been/intend to max out the AA but doubt that applies does it?). What is it you're worried about? 

Tax relief is added by my employer at source (rather than added by the pension fund or by me claiming it back). 

Tax relief is not "added" by the employer. That doesn't happen. What you probably mean is the employer pays it into the pension rather than to you and therefore you don't pay tax on it because you weren't paid it in salary (usually known as salary sacrifice). That's not "tax relief" technically, same if you took unpaid leave, it's just that you don't get taxed on the salary you sacrificed. 

Or the employer deducts the contribution from your pay before applying tax and so reduces your taxable income (known as "net pay").

If the £30k is paid in the new tax year, when my earnings will be uncertain at best and potentially zero, then I may fall foul of the rule that says the annual allowance for pension contributions is the lowest of $60k or 100% of your earnings.

There is no such rule. Wherever you read that or whoever told you doesn't know what they're talking about. The annual allowance does not depend on how much you earn (except for very high earners, £200k+). The annual allowance for everyone this year is £60k, except very high earners and those who've triggered the MPAA (ie flexibly accessed a pension already). 

But separately, there's a limit on tax relief of 100% of earnings. This is NOTHING TO DO with the annual allowance. It's a separate limit. 

If your employer pays direct into the pension as an employer contribution, then the tax relief limit is not relevant. You don't get tax relief on employer contributions as mentioned above. So only the annual allowance is relevant, and even if you exceed it you can usually carry forwards any spare you had from previous years. 

If your employer uses net pay, then that doesn't matter either, as the tax relief will be given in the payslip where the redundancy is paid and the pension contribution deducted. So you get the tax relief at the time of the "earnings" (which can include the TAXABLE part of redundancy). It doesn't matter if the employer pays it in later even in a new tax year. 

If the employer used RAS (relief at source) where the pension cont is deducted from after tax pay and the pension company claims the tax relief, then there could be a problem. But from what you've said that's not the case.  

Pat38493

zagfles said:

xylophone said:

I have also decided to retire at the same time and not look for another job.

Are you saying that you will have no "relevant earnings" in 2024/5?

https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm044100

How old are you?

As it says in that link, redundancy above the tax free £30k is relevant earnings. 

Isn't this the key point - even if the redundancy payment is made in the next tax year, it counts as relevant earnings so it should not be an issue.  Also, if the payment is being made by redundancy sacrifice the earnings limit wouldn't apply anyway?