Can you use pay in lieu of notice to make a personal pension contribution

islander2025

Hi, I have been made redundant from 30th April 2026 because the company is closing. In additional to a redundancy payment, I will receive around £11,000 gross which is made up of my usual salary for the month, pay in lieu of notice and holiday pay. I will not be doing any further work from this date so this will be my total income for the next tax year.

I wondered if I am allowed to pay the £11,000 as a personal contribution to my pension so this would mean paying £8,800 and the pension company re-claiming £2,200 tax.

As this will be my only income for the year, it will be below my personal tax allowance so would the pension company still be able to claim the full tax relief.

I am thinking that this is also going to be a little messy with HMRC as they will probably tax me at 40% when I receive the £11,000 through PAYE as they will think I am going to be earning this every month. I guess I can just call them and let them know the situation.

Thank you very much indeed for any guidance.

Dazed_and_C0nfused

https://forums.moneysavingexpert.com/discussion/6660436/can-you-use-pay-in-lieu-of-notice-to-make-a-personal-pension-contribution

If you are making relief at source contribution then it doesn't matter if you pay any tax or not.

Is the £11,000 the figure you expect to see on your P45 in due course?

And if so you possibly need to factor in existing contributions made from your 2026/27 earnings?

Marcon

I am thinking that this is also going to be a little messy with HMRC as they will probably tax me at 40% when I receive the £11,000 through PAYE as they will think I am going to be earning this every month. I guess I can just call them and let them know the situation.

See https://www.moneyhelper.org.uk/en/work/losing-your-job/claiming-your-tax-rebate-after-losing-your-job

islander2025

Thank you for the information. The £11,000 will be paid to me via PAYE as my last pay packet (less the tax and NI). I would then make a personal contribution to the pension. This would be my only income for the year 2026/27. Thank you

Marcon

Will you have made any personal contributions to your workplace pension for April? If so, you need to deduct these (the gross amount) from the £11k when working out how much more you can contribute.

Dazed_and_C0nfused

https://forums.moneysavingexpert.com/discussion/comment/81929463#Comment_81929463

Are you not in your employers pension scheme?

islander2025

No I am not in my employers pension scheme. I have a good sum in pension from previous employment but over the past few years I have saved into ISA's instead.

saajan_12

what would be the point? You dont get back tax that you havent paid** so you just transfer the same £ into the pension scheme and then may or may not pay tax on it when you later withdraw it.

** With the exception of ~£3.5k which you can get 20% tax relief on regardless.

Edit: striking out as corrected by other posters.

Dazed_and_C0nfused

https://forums.moneysavingexpert.com/discussion/comment/81929604#Comment_81929604

You are so wrong there.

Marcon

https://forums.moneysavingexpert.com/discussion/comment/81929604#Comment_81929604

This is a very common misconception, and unfortunately it's perpetuated by repetition!

OP has correctly identified the they can pay 80% of their gross earnings in the tax year in which they will make the personal contribution and the pension provider will add the 'tax top up' at basic rate. The £3,500 limit you quote applies to non-earners rather than non-taxpayers.

Have a look at https://www.litrg.org.uk/pensions/paying-pensions/tax-relief-pension-contributions for fuller information.

Marcon

Here's the salient paragraph from the link above:

Relief at source scheme

If your pension uses the relief at source method of tax relief and you earn, say, £5,000 in the 2025/26 tax year, you can make a gross contribution of up to £5,000 into that pension. This equates to a net contribution (the amount actually paid in by you) of £4,000, because you make your contribution net of basic rate tax relief (£1,000) which the pension scheme will claim directly from HMRC. If you earn £3,000, you can still make a gross contribution of £3,600 (£2,880 net). In either case, the fact that you do not earn enough to pay any income tax does not prevent the pension scheme claiming the tax relief.