How to cut on taxes after redundancy payout

Gobigorgohome

Advice please!
getting redundancy £140k (£110k subject to taxes)
YTD earned £47k
expected more income this tax year circa £10-£15k (if I find a new job) which will take me to way above 45% tax bracket
monthly expenses £6k

what should I do with redundancy money to reduce the tax but also earn something 
I need to have instant access to at least 6 months expenses as not sure how long will take me to get a job. No other income available and huge outstanding mortgage 

eskbanker

Pension contributions are usually the most sensible way to reduce tax liabilities in such circumstances, as long as you can afford to lock the money away until 57+.

Gobigorgohome

How much would I need to put to pension to make it tax worth it?
im planning to put remainder into cash isa and premium bonds. Is this the right decision?

sheenas

Age is an important factor here. If you’re above 55 and can afford it use your pension as a tax effective solution. 

eskbanker

Gobigorgohome said:

How much would I need to put to pension to make it tax worth it?
im planning to put remainder into cash isa and premium bonds. Is this the right decision?

Entirely up to you to judge what's 'worth it', but getting adjusted net income significantly below £125K or even £100K would seem an obvious target.

Cash ISA and/or premium bonds are both tax-free but in itself that doesn't make them the right decision, as that's dependent on your overall financial circumstances and how this money relates to them.  It's generally better to aim to maximise net return than to minimise tax, as they're often not the same thing....

Johnnyboy11

Have you considered leaving the UK to live and work overseas? Your future earnings would not subject to UK income tax from the day you leave the UK, providing you become and remain UK non-resident (as per the Statutory Residence Test, and split-year treatment is available for the years you leave and return to the UK). I would give this serious consideration given your circumstance.

Gobigorgohome

sheenas said:

Age is an important factor here. If you’re above 55 and can afford it use your pension as a tax effective solution. 

I’m mid 40s so still a bit to go. I’d add some of it into pension but just trying to figure out how much so it still leaves me with enough cash

DRS1

You could in theory contribute your earnings to date plus the taxable part of the redundancy payment to a pension but that would not give you the 6 months buffer you want and would mean a look at the annual allowance (£60K including employer contributions your contributions so far this tax year and the tax relief claimed by the pension scheme).

Do think about trying to get yourself under the £100k level if you can - currently that would mean contributing (gross) c £57k.  That ignores the expected £10 - 15k income

Don't forget other taxable income.

You may need to think about what annual allowance you might have left over from past years.

Or you may just think take £140k put £20k in an ISA, £50k in premium bonds that leaves £70k.  Do you want to put half of that in cash savings accounts (to cover £6k pm for about 6 months) and the rest in a pension?  Might not leave much for the pension - presumably the tax will have been taken off the £140k so that won't be your actual starting point.

Gobigorgohome

DRS1 said:

You could in theory contribute your earnings to date plus the taxable part of the redundancy payment to a pension but that would not give you the 6 months buffer you want and would mean a look at the annual allowance (£60K including employer contributions your contributions so far this tax year and the tax relief claimed by the pension scheme).

Do think about trying to get yourself under the £100k level if you can - currently that would mean contributing (gross) c £57k.  That ignores the expected £10 - 15k income

Don't forget other taxable income.

You may need to think about what annual allowance you might have left over from past years.

Or you may just think take £140k put £20k in an ISA, £50k in premium bonds that leaves £70k.  Do you want to put half of that in cash savings accounts (to cover £6k pm for about 6 months) and the rest in a pension?  Might not leave much for the pension - presumably the tax will have been taken off the £140k so that won't be your actual starting point.

That’s right out of the£140k only £30 is not taxed, the rest will be at 45% so it will be around £90k
i can’t figure out how much to put into pension so that I’m not hit with 45% tax. I need to have at least £40k as I will have no income and no job for a while so I’ll need that money to live on

Dazed_and_C0nfused

Gobigorgohome said:

DRS1 said:

You could in theory contribute your earnings to date plus the taxable part of the redundancy payment to a pension but that would not give you the 6 months buffer you want and would mean a look at the annual allowance (£60K including employer contributions your contributions so far this tax year and the tax relief claimed by the pension scheme).

Do think about trying to get yourself under the £100k level if you can - currently that would mean contributing (gross) c £57k.  That ignores the expected £10 - 15k income

Don't forget other taxable income.

You may need to think about what annual allowance you might have left over from past years.

Or you may just think take £140k put £20k in an ISA, £50k in premium bonds that leaves £70k.  Do you want to put half of that in cash savings accounts (to cover £6k pm for about 6 months) and the rest in a pension?  Might not leave much for the pension - presumably the tax will have been taken off the £140k so that won't be your actual starting point.

That’s right out of the£140k only £30 is not taxed, the rest will be at 45% so it will be around £90k
i can’t figure out how much to put into pension so that I’m not hit with 45% tax. I need to have at least £40k as I will have no income and no job for a while so I’ll need that money to live on

Trying to avoid 45% tax is understandable but don't forget before you pay 45% there is the slice which is officially taxed at 40% but in reality is 60% due to the loss of the Personal Allowance.

That's what the reference to reducing your adjusted net income (which is different to taxable income) relate to.

DRS1

First not all of the taxable bit of the redundancy payment will attract 45% tax  It is probably mostly only 40% but there is the "60%" band above £100k which is why I suggested paying enough pension contributions to get your taxable income (sorry if I am using the wrong terminology) below £100k for this tax year.

The 45% band starts at £125140 so if you are getting taxable income of say £160k then you need to contribute (gross) £34860..  But like I say if I were you I'd want to be contributing more than that to get below the £100k mark (where you start to lose the personal allowance)

Second if you can decide on an amount for the pension contribution see if your employer will make that contribution to your pension as a redundancy payment sacrifice (salary sacrifice but for the redundancy payment).  If they will do it that may help with not having as much tax deducted up front.