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.

Bah_humbug

Hi new to the forum and have a related question to the OP. I am  shortly going to be offered MAVE (voluntary redundancy).
Totalling £90k to leave within this FY.
 I have a DB/ final salary pension and have tried to maximise my lump sum to just under the £268k so I think there is  no point asking my employer  to add any of the £90k to this at this point.

 My question is: could I start a SIPP, pay the redundancy money in  (not the tax free £30K)  the £60K   ( or what's left of the £60K after tax  at 40% & possibly 45%?)  and then claim the tax back so it becomes £60K again in the SIPP ? My plan would then be to draw it down the following FY e.g. 6 April 2026 onwards  as income.   The following year April 27, the DB scheme would begin to pay out as I hit will 60 yrs old  March 2027. The point of doing this being that id only pay 20% tax on most of the 60k as opposed to 40%.

Does that sounds feasible, reasonable, legal?

What is the process for claiming the tax back on what I would manually put in the SIPP? 

Dazed_and_C0nfused

Bah_humbug said:

Hi new to the forum and have a related question to the OP. I am  shortly going to be offered MAVE (voluntary redundancy).
Totalling £90k to leave within this FY.
 I have a DB/ final salary pension and have tried to maximise my lump sum to just under the £268k so I think there is  no point asking my employer  to add any of the £90k to this at this point.

 My question is: could I start a SIPP, pay the redundancy money in  (not the tax free £30K)  the £60K   ( or what's left of the £60K after tax  at 40% & possibly 45%?)  and then claim the tax back so it becomes £60K again in the SIPP ? My plan would then be to draw it down the following FY e.g. 6 April 2026 onwards  as income.   The following year April 27, the DB scheme would begin to pay out as I hit will 60 yrs old  March 2027. The point of doing this being that id only pay 20% tax on most of the 60k as opposed to 40%.

Does that sounds feasible, reasonable, legal?

What is the process for claiming the tax back on what I would manually put in the SIPP? 

There is nothing for you to claim back in the way you seem to be suggesting.

If you add £60,000 it would have £15,000 added in basic rate tax relief so you have a pension fund of £75,000.  Annual allowance may be an issue you will need to consider.

Any personal tax saving depends on what your taxable income is (and types of income) in the year you make the (relief at source) contribution.  Any personal tax savings benefits you, it is never added to the pension fund.

Bah_humbug

Thanks for replying , I'll try and rephrase. Assuming I take the redundancy , they will pay me £90k ( £30K will be tax free ) the other £60k will be subject to tax at 40% so I'll get £36k. If I pay the £36k into a SIPP can I claim back the tax so it becomes £60 K again? The following year I would access the money   use it as income at which point I'd have £12570 tax free , most of the rest at 20% ,the last  bit at %40. Is that possible? Note I will have unused allowance in previous years.

QrizB

Bah_humbug said:

If I pay the £36k into a SIPP can I claim back the tax so it becomes £60 K again? 

No, not exactly.

The £36k will receive £9k RAS tax relief making £45k on the SIPP. Your 20% tax band will be increased by £45k which means you'll pay less income tax, but that will end up in your bank account not the SIPP.

If you want £60k in your SIPP you'll need to contribute £48k.