Redundancy Payment Methods into a Company DC Pension?

Bladerunner123

Hi All

I’m looking for a bit of clarity regards to how an employer pays redundancy into a DC company pension.

My employer is offering to pay a defined amount above the tax free £30K, from my redundancy settlement pay, into my current company DC pension. This is good news apart from the payment method they are choosing to use.

My employer will be using the ‘Employer Redundancy AVC’ payment method as opposed to the much better ‘Redundancy Sacrifice (Salary Sacrifice)’ payment method.

The tax liabilities associated with using the Redundancy Sacrifice (Salary Sacrifice) payment method are very clear – No income tax and No NI tax liabilities.

However, the tax liabilities associated with using the ‘Employer Redundancy AVC’ payment method are a lot less clear with the explanations on the web being a bit mixed. Most state that there will be no income tax liability, but that there will be a NI tax liability, which you then need to claim back through a tax return.

The ‘Redundancy Sacrifice (Salary Sacrifice)’ payment method looks to be so much better, less hassle and less tax liability, compared to the ‘Employer Redundancy AVC’ payment method.

Have I understood these two methods of payment correctly?

Thanks in advance.

El_Torro

It depends on the deal you get with your (soon to be former) employer but generally speaking redundancy payments are not subject to National Insurance. So assuming that none of your payment is subject to NI it doesn't really matter which of the two methods they use to pay into your pension. You can even do it yourself and claim back the Income Tax yourself.

Even if your payout is subject to NI it could be a hard sell to ask your employer to use the salary sacrifice method, especially if they don't currently have a salary sacrifice system set up.

Dazed_and_C0nfused

https://forums.moneysavingexpert.com/discussion/6656473/redundancy-payment-methods-into-a-company-dc-pension

I would be interest to know how you think you can claim an NI refund through a (Self Assessment) tax return.

Or even why you think an NI refund would be due in the first place?

Bladerunner123

Apologies for any confusion as what I’ve read on the web says one thing then another regards AVC payments. Maybe there is a web search muddle happening between ‘who’ pays the AVC into the pension:

1. The Employer as an ‘Employer Redundancy’ AVC
2. The Employee as a ‘Personal Contribution’ AVC

Below is what Google has returned regards the differences:

"An employer redundancy Additional Voluntary Contribution (AVC) and a redundancy salary sacrifice payment are not identical, although both are tax-efficient methods to put redundancy money into a pension. A salary sacrifice arrangement typically avoids both income tax and National Insurance (NI), whereas an AVC usually only provides income tax relief.

Key Differences:

• Redundancy Sacrifice (Salary Sacrifice): You agree to swap part of your taxable redundancy pay (or notice pay) for an employer contribution into your pension before tax and NI are deducted. This is highly efficient as it saves both income tax and NI.
• Employer Redundancy AVC: This is often an Additional Voluntary Contribution made from your net pay, or a specifically arranged contribution that may not carry the same NI savings as a full salary sacrifice, typically offering tax relief only.
• Tax Treatment: The first £30,000 of redundancy pay is tax-free. Sacrifice arrangements are best used to avoid tax/NI on amounts above £30,000

It is highly recommended to confirm with your employer if they can treat the contribution as an employer contribution to maximize savings."

My current pension payments are done through Salary Sacrifice, so it should not be a major hassle for the company to use the same method for my redundancy payment.

Thanks both for your patience.

Dazed_and_C0nfused

https://forums.moneysavingexpert.com/discussion/comment/81895211#Comment_81895211

Only your employer can explain why they will/won't do something.

But there is nothing in that explanation which refers to completing a tax return or getting an NI refund.

Bladerunner123

Will do, I'll ask my employer.

Regards the tax return / NI refund it came up in a search, but from what you have now confirmed is obviously an error - thanks

SimonSeys

Just jumping on here with a related question, but am I right in thinking that such payments count towards the £60k annual allowance? (Which may or may not be relevant for the OP).

NoMore

https://forums.moneysavingexpert.com/discussion/comment/81895350#Comment_81895350

All contributions to DC pensions count against the allowance, no matter the source. DB pensions are different but they also have a method of determining their allowance usage.

SimonSeys

https://forums.moneysavingexpert.com/discussion/comment/81895377#Comment_81895377

Thanks. Not the answer I was hoping for, or indeed expecting, but helpful to have confirmation.

Marcon

Thanks. Not the answer I was hoping for, or indeed expecting, but helpful to have confirmation.

This might make useful 'further reading' for you and possibly others reading this thread:

https://www.moneyhelper.org.uk/en/pensions-and-retirement/pension-problems/your-pension-options-if-you-re-made-redundant