Paying redundancy payment into private pension

Yeoldfoggy

 Im 57 a higher rate tax payer and am due to receive a redundancy payment some of which I will need to pay tax and NI.

Is there any reason why I shouldn't / can't put the part of the redundancy payment that is taxed into a private pension and claim back the tax. Ive enough pension allowance banked from previous years. 

Am I right in thinking if I want to use this money next year - I can draw down 25% tax free but the rest would be taxed as income and Id only be able to put 10,000 pounds the year I take more than 25% into a pension. 

Thank you for any help and any advice.

MallyGirl

you can certainly put redundancy money into a pension to get the tax rebate.
If you contribute to your employer pension via salary sacrifice then that would be even better - to avoid NI as well. I am currently doing the calculations on that (bearing in mind £30k being tax and NI free so you wouldn't want that going into a pension via sal sac only for 75% of it to then become taxable).
Once you withdraw even a single penny of taxable income from a DC pension this will trigger the MPAA which is currently £10k.

Marcon

Yeoldfoggy said:

 Im 57 a higher rate tax payer and am due to receive a redundancy payment some of which I will need to pay tax and NI.

Is there any reason why I shouldn't / can't put the part of the redundancy payment that is taxed into a private pension and claim back the tax. Ive enough pension allowance banked from previous years. 

How much earned income will you have in the tax year in which you do this? Simply not using the full allowance in previous years isn't enough. You can't use carry forward unless you have enough earnings to cover the contribution you make, including anything you have 'banked' from previous years. 

Yeoldfoggy said:

Am I right in thinking if I want to use this money next year - I can draw down 25% tax free but the rest would be taxed as income and Id only be able to put 10,000 pounds the year I take more than 25% into a pension. 

Thank you for any help and any advice.

If you 'flexibly access' taxable cash from a defined contribution (DC) scheme, you are limited to a maximum of £10K tax-relievable contributions (yours + tax relief + any employer contributions if you get another job) each year to your SIPP or any other DC scheme you might join. It applies every year going forward, not just the year in which you tax taxable cash. Just taking the tax free 25% doesn't trigger the £10K restriction.

Marcon

MallyGirl said:

you can certainly put redundancy money into a pension to get the tax rebate.
If you contribute to your employer pension via salary sacrifice then that would be even better - to avoid NI as well. I am currently doing the calculations on that (bearing in mind £30k being tax and NI free so you wouldn't want that going into a pension via sal sac only for 75% of it to then become taxable).
Once you withdraw even a single penny of taxable income from a DC pension this will trigger the MPAA which is currently £10k.

...unless you have used the money to buy an immediate lifetime annuity, in which case the MPAA isn't triggered. Nor is it triggered if you withdraw the money using the 'small pots' regime (which doesn't count as 'flexibly accessing').

Cobbler_tone

Marcon said:

Yeoldfoggy said:

 Im 57 a higher rate tax payer and am due to receive a redundancy payment some of which I will need to pay tax and NI.

Is there any reason why I shouldn't / can't put the part of the redundancy payment that is taxed into a private pension and claim back the tax. Ive enough pension allowance banked from previous years. 

How much earned income will you have in the tax year in which you do this? Simply not using the full allowance in previous years isn't enough. 

If they are receiving redundancy, isn't it is a case that this is earned income in the current tax year?
E.g. salary of £60k and redundancy of £100k, you have £160k of earned income. You could take the £30k tax free and pay £70k (of remaining redundancy) into your pension if you had the remaining allowance to do so across the past three years?

Marcon

Cobbler_tone said:

Marcon said:

Yeoldfoggy said:

 Im 57 a higher rate tax payer and am due to receive a redundancy payment some of which I will need to pay tax and NI.

Is there any reason why I shouldn't / can't put the part of the redundancy payment that is taxed into a private pension and claim back the tax. Ive enough pension allowance banked from previous years. 

How much earned income will you have in the tax year in which you do this? Simply not using the full allowance in previous years isn't enough. 

If they are receiving redundancy, isn't it is a case that this is earned income in the current tax year?
E.g. salary of £60k and redundancy of £100k, you have £160k of earned income. You could take the £30k tax free and pay £70k (of remaining redundancy) into your pension if you had the remaining allowance to do so across the past three years?

Not quite. The first tax-free £30K of a redundancy payment doesn't count as earned income for the purposes of pension contributions. 

Cobbler_tone

Marcon said:

Cobbler_tone said:

Marcon said:

Yeoldfoggy said:

 Im 57 a higher rate tax payer and am due to receive a redundancy payment some of which I will need to pay tax and NI.

Is there any reason why I shouldn't / can't put the part of the redundancy payment that is taxed into a private pension and claim back the tax. Ive enough pension allowance banked from previous years. 

How much earned income will you have in the tax year in which you do this? Simply not using the full allowance in previous years isn't enough. 

If they are receiving redundancy, isn't it is a case that this is earned income in the current tax year?
E.g. salary of £60k and redundancy of £100k, you have £160k of earned income. You could take the £30k tax free and pay £70k (of remaining redundancy) into your pension if you had the remaining allowance to do so across the past three years?

Not quite. The first tax-free £30K of a redundancy payment doesn't count as earned income for the purposes of pension contributions. 

Makes sense. I know it is common place for people at my company to redirect redundancy payments (beyond the £30k) into their pension....and in my 30+ years we've had a lot of redundancies! Good to know what counts as income.