Tax help on redundancy payment

sarah759365 · 14 October 2016 at 3:27PM

Hi,

Before i start - I know i'm in a fortunate position and i'm not looking to get out of paying any tax - I'm just hoping someone can explain how much I can expect to pay

I am about to be made redundant from a company I have worked for for a long time. My redundancy payment will be £89k.

My current salary is £66,300 and I receive a £7k per year car allowance.

I understand that the first £30k of my redundancy payment will be tax free. However due to the large amount of money involved in the payment I will go over the £100k mark to become liable for the higher rate of tax.

How can I work out the amount of tax I will have to pay on the £89k? I'd like to understand so I can make some financial plans and understand how long I have to find a new job

Thanks
Sarah

[Deleted User] · 14 October 2016 at 4:28PM

There is no higher rate of tax at the £100000 threshold. Perhaps you are referring to the £150000 level when tax is levied at 45% rather than 40%.

However, at £100000 you start you lose your personal allowance at the rate of £1 for every £2 over this amount Effectively the tax rate between £100000 and £122000 is 60% and your redundancy payment will take you through this.

At the moment you have your personal allowance against your salary and I will assume that your code is 1100L.

Tax with redundancy:

Salary £66300 plus car allowance £7000 plus taxable redundancy payment £59000 totals £132300.

Tax £32000 at 20% plus £100300 at 40% is £46520.

Tax without redundancy:

Salary £66300 plus car allowance £7000 = £73300 less personal allowance £11000 = £62300

Tax is £32000 at 20% plus £30300 at 40% = £18520

The difference, i.e. tax on the redundancy is £28000

(Or taxable redundancy payment £59000 , therefore £37000 at 40% plus £22000 at 60% = £28000)

I have ignored pension contributions as you have not mentioned them

xylophone · 14 October 2016 at 4:30PM

The £59,000 is taxable as income in the year of receipt.

https://www.gov.uk/government/publications/tax-and-tax-credit-rates-and-thresholds-for-2016-17/tax-and-tax-credit-rates-and-thresholds-for-2016-17

Had you thought of paying as much as possible into a pension?

https://www.usdaw.org.uk/CMSPages/GetFile.aspx?guid=91785e00-5095-43a7-87e1-28d1921d8770

http://adviser.royallondon.com/pensions/technical-central/information-guidance/contributions-and-tax-relief/60-tax-relief-on-pension-contributions/

Dazed_and_confused · 14 October 2016 at 4:35PM

It may be just confusing terminology but from what you have said you won't "become liable for the higher rate of tax".

You already earn enough (annually) to pay the higher rate of tax (40%) on all of the taxable redundancy payment but you wont, on the limited info you have given, need to pay additional rate tax (45%).

You will though be in the region of earnings (£100000+) where you will lose some or all of your personal allowance and this has a dramatic effect on the amount of tax you could have to pay.

Anyway, impossible to say how much tax you will have to pay on the redundancy without knowing actualpaid salary in existing job and what you expect to earn in the rest of the tax year and what other income you have.

You might want to budget for 45% (approx £26-£27000) and look into pensions - these may be very tax efficient in your situation.

Google adjusted net income and earning over £100,000 - can be a win, win, win situation with you qualifying for basic rate tax relief at source, higher rate tax relief from the HMRC and you may also keep some of your personal allowance.

[Deleted User] · 14 October 2016 at 4:52PM

Dazed_and_confused wrote: »

It may be just confusing terminology but from what you have said you won't "become liable for the higher rate of tax".

You already earn enough (annually) to pay the higher rate of tax (40%) on all of the taxable redundancy payment but you wont, on the limited info you have given, need to pay additional rate tax (45%).

You will though be in the region of earnings (£100000+) where you will lose some or all of your personal allowance and this has a dramatic effect on the amount of tax you could have to pay.

Anyway, impossible to say how much tax you will have to pay on the redundancy without knowing actualpaid salary in existing job and what you expect to earn in the rest of the tax year and what other income you have.

You might want to budget for 45% (approx £26-£27000) and look into pensions - these may be very tax efficient in your situation.

Google adjusted net income and earning over £100,000 - can be a win, win, win situation with you qualifying for basic rate tax relief at source, higher rate tax relief from the HMRC and you may also keep some of your personal allowance.

Having looked with hindsight, and doing that calculation :rotfl:, it has occurred to me that, if the redundancy payment takes her into and beyond the £100000 - £122000 bracket (but less than £150000) the tax due will always be £28000 i.e. £22000 at 60% plus £37000 at 40%.

Too logical for this time of the week!

agrinnall · 14 October 2016 at 5:35PM

[quote=[Deleted User];71453562]

Tax with redundancy:

Salary £66300 plus car allowance £7000 plus taxable redundancy payment £59000 totals £132300.

Tax £32000 at 20% plus £100300 at 40% is £46520.

Tax without redundancy:

Salary £66300 plus car allowance £7000 = £73300 less personal allowance £11000 = £62300

Tax is £32000 at 20% plus £30300 at 40% = £18520

The difference, i.e. tax on the redundancy is £28000

(Or taxable redundancy payment £59000 , therefore £37000 at 40% plus £22000 at 60% = £28000)

I have ignored pension contributions as you have not mentioned them[/QUOTE]

But what you've also ignored is that the £66300 is a full year's salary, whereas if the OP is made redundant before next March she'll have actually earned less than that, so that tax due in both cases is lower than these calculations. I realise that without knowing what the pay at redundancy date is, and any other earnings before the end of March if she gets a new job, it's impossible to make the correct calculation, but these figures will definitely be wrong based on what the OP has said.

[Deleted User] · 14 October 2016 at 7:05PM

agrinnall wrote: »

But what you've also ignored is that the £66300 is a full year's salary, whereas if the OP is made redundant before next March she'll have actually earned less than that, so that tax due in both cases is lower than these calculations. I realise that without knowing what the pay at redundancy date is, and any other earnings before the end of March if she gets a new job, it's impossible to make the correct calculation, but these figures will definitely be wrong based on what the OP has said.

Of course I agree with you on the part year salary. It was simply an attempt to give the op a guide based on the information provided.

Tax help on redundancy payment

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