What to do With Redundancy Payout
Discussion
My position is about to be made redundant and as I've been there over 20 years I will get a reasonable payout. I understand that anything over £30k I take in cash will be taxed but what if I elect to have it paid into my pension do I avoid this? I won't be on the breadline if I do as I have some savings, my wife works and I'm thinking about retiring anyway.
Just cut this from an article I read recently........
Topping up a pension arrangement
Clearly a large capital payment would be attractive to many individuals, even if it will suffer income tax and
possibly National Insurance. However, if an individual is prepared to consider sacrificing the excess over
and above the £30,000 tax free payment then this can be paid into a pension scheme by the employer. For
this to be tax-deductible for the employer, it would need to satisfy the 'wholly and exclusively' test. Broadly
speaking, this would be undertaken in an identical manner to a bonus sacrifice.
Even if the employer is not willing to consider such a course of action, there is still an opportunity for the
individual to plan. Since A-Day, redundancy payments in excess of the £30,000 tax-free ceiling are deemed
to be Relevant UK Earnings and, as such, can be used to justify a personal contribution to a registered
pension scheme. If an individual receives a redundancy payment of £60,000 which is not liable to NICs then
the net amount received would be £48,000 assuming the excess over the £30,000 is all liable to tax at 40%.
Based on the £60,000 gross and £48,000 net figures mentioned in the preceding paragraph, if a personal
pension contribution of £24,000 were made this would gross up to £30,000 at basic rate tax. This would only
leave the individual with £24,000 in their own hands. However, in due course the higher rate income tax
refund of £6,000 would be received thus replenishing the cash held by the individual to £30,000. This would
leave them in the same position, albeit after a time delay, as if the £30,000 taxable element of the
redundancy payment had been sacrificed.
Any such planning will need to take account of the annual allowance limits if an annual allowance charge is
to be avoided. Although the annual allowance has been reduced to £50,000 for tax years 2012/13 and
2013/14, the carry forward provisions, which enable advantage to be taken of any unused annual allowance
over the three immediately preceding tax years, should mean that an annual allowance charge can be
avoided in most cases.
Where the contribution exceeds the annual allowance, including any carry forward, the individual is subject
to income tax on the excess contribution.
Individuals should also bear in mind the lifetime allowance (generally £1.5m for the tax years 2013/14 and
£1.25m in 2013/14). If the value of the individual's accrued pension rights when he takes his benefits
exceeds this, the individual is subject to a recovery tax charge.
Topping up a pension arrangement
Clearly a large capital payment would be attractive to many individuals, even if it will suffer income tax and
possibly National Insurance. However, if an individual is prepared to consider sacrificing the excess over
and above the £30,000 tax free payment then this can be paid into a pension scheme by the employer. For
this to be tax-deductible for the employer, it would need to satisfy the 'wholly and exclusively' test. Broadly
speaking, this would be undertaken in an identical manner to a bonus sacrifice.
Even if the employer is not willing to consider such a course of action, there is still an opportunity for the
individual to plan. Since A-Day, redundancy payments in excess of the £30,000 tax-free ceiling are deemed
to be Relevant UK Earnings and, as such, can be used to justify a personal contribution to a registered
pension scheme. If an individual receives a redundancy payment of £60,000 which is not liable to NICs then
the net amount received would be £48,000 assuming the excess over the £30,000 is all liable to tax at 40%.
Based on the £60,000 gross and £48,000 net figures mentioned in the preceding paragraph, if a personal
pension contribution of £24,000 were made this would gross up to £30,000 at basic rate tax. This would only
leave the individual with £24,000 in their own hands. However, in due course the higher rate income tax
refund of £6,000 would be received thus replenishing the cash held by the individual to £30,000. This would
leave them in the same position, albeit after a time delay, as if the £30,000 taxable element of the
redundancy payment had been sacrificed.
Any such planning will need to take account of the annual allowance limits if an annual allowance charge is
to be avoided. Although the annual allowance has been reduced to £50,000 for tax years 2012/13 and
2013/14, the carry forward provisions, which enable advantage to be taken of any unused annual allowance
over the three immediately preceding tax years, should mean that an annual allowance charge can be
avoided in most cases.
Where the contribution exceeds the annual allowance, including any carry forward, the individual is subject
to income tax on the excess contribution.
Individuals should also bear in mind the lifetime allowance (generally £1.5m for the tax years 2013/14 and
£1.25m in 2013/14). If the value of the individual's accrued pension rights when he takes his benefits
exceeds this, the individual is subject to a recovery tax charge.
I recieved an email today saying that my ex gratia payment will be paid in full in my final pay packet contrary to what I asked them to do and pay anything in excess of £30k into my pension. Apparently the wording of the redundancy agreement said this although to me it read I would get £30k tax free and didn't mention the rest wouldn't be paid into my pension as I requested. If I want to change this and get it paid into my pension I need to instruct them through our solicitors at my cost by Friday. At the consultation meetings they said it was a bit difficult to pay into my pension and it seems to me they are trying to weasel out of it. I'm tempted to call their bluff and get the solicitor onto it. Is it worth it or should I bite the bullet and make a manual payment and calim the tax back. AFAIK I will pay NI which equates to about £1600.
I'm not a wizard on redundancy but,
To get answers to your questions you will need to tell someone full details of your redundancy payment, earnings etc, as set out in Jockman's post above. If it's straightforward you might well get further guidance on here. Otherwise you need to find yourself an accountant.
- You get your £30,000 tax free - so far so good
- Everything above £30k is taxable as income at your usual marginal rate for the year. However, YOU can get tax relief on YOUR pension contributions, although there are some maximum limits.
To get answers to your questions you will need to tell someone full details of your redundancy payment, earnings etc, as set out in Jockman's post above. If it's straightforward you might well get further guidance on here. Otherwise you need to find yourself an accountant.
If I'm understanding correctly the urgency may be that on Friday the employer will be issuing a pay cheque that will have NI on it that will be irrecoverable. Pension contributions can be done at any stage as I don't think we're going near the £40k AIA - it's only the surplus over £30k that is of concern. Apologies if I have misunderstood.
Thanks for the replies. Yes I need to conclude this by Friday or they pay me the whole amount. My understanding is that the first £30k is tax free but anything over (£20k in this instance) will be subject to tax and NI. if they pay the balance into my pension as I asked all of it would be free of tax and NI. If I subsequently pay it into my pension I get the tax back but the NI is gone for ever. If this is the case it seems a no brainer to pay my solicitor for a letter to get them to pay it into my pension.
Edited by Spydaman on Tuesday 10th May 07:18
If I'm reading the Govt site correctly, there is no NI on Redundancy Pay, only tax above £30k.
https://www.gov.uk/staff-redundant/redundancy-pay
Please firm this up with your company before paying for a Solicitor's letter.
https://www.gov.uk/staff-redundant/redundancy-pay
Please firm this up with your company before paying for a Solicitor's letter.
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