Income Tax Additional Rate Threshold

[jpf7]

I have been in negotiation with my employer for a settlement agreement to leave. We are now in agreement on the financial piece and a leave date. Under the draft settlement agreement they will pay the complete financial amount on or before 22 March 2018. If this happens I will exceed the £150K additional rate threshold and see a reduction in the amount I can pay to my pension (even with the £30K tax free settlement amount allowed by HMRC). The structure of the settlement is payment in lieu of notice, employment benefits payments and unused holiday plus compensation for loss of job. By far the larger amount is the compensation. The compensation amount reflects the period I need to find another job in 2018/19 tax year. Would it be legitimate tax optimisation to have two payments from my employer written into the settlement agreement, one in March 2018 (lieu of notice + holiday + benefits payments) and one in April 2018 (compensation)?
The lieu of notice takes me into 2018/19 tax year as it is 6 weeks from 1 March 2018.
Would appreciate all thoughts and input?
Thanks!

[someone]

I don't think there's any problem so long as your settlement agreement doesn't make you *entitled* to the money in the previous tax year. My settlement agreement was paid in two installments, nothing to do with tax but the second payment was paid three months later on condition that I didn't sue the company for not following the normal consultation process (My lawyer explained that there's only a three month window for bringing action) and therefore, had the payment crossed the tax year, I would have declared them in different tax years.

My guess (but check with your lawyer - who you have to have look over your settlement agreement to make it binding anyway - my employer paid for this) is that provided there's something you must do, or must not do, in order to get the second payment then the second payment will fall into the other tax year.

But watch out for that 30K tax free bit. At least one pension company says that the 30K tax free bit still reduces your pension annual allowance (I think it was the PRU but I cannot be sure now). Having spent a bit of time digging through the various bits of law, I'm not convinced they're correct, I think the tax free bit is not taxable income and therefore does not come into the calculation of adjusted income rather than being taxable income with a relief to exempt it from income tax (in which case it would affect adjusted income)

[someone]

To add - if you believe me over the prudential on how pensions are taxed then you're completely on your own. Best I can say is that it might be worth getting a second opinion (from an expert, not some clown on the internet who knows a little bit about a few corners of tax and nothing at all about most of it, who doesn't even know how much he doesn't know!)

[someone]

30k tax free still included in adjusted income:
https://www.pruadviser.co.uk/pdf/GENM675401.pdf

Dissenting view:
http://reference.scottishwidows.co.uk/docs/56262.pdf

It's not easy and we're talking nearly 7k of tax at stake if you get it wrong.

[jpf7]

Thanks for the information. Your input confirms the advice I have been given. I actually phoned HMRC helpline, the advisor described the split payments as a 'grey' area! My employer will take their own legal and HMRC advice as well so I feel comfortable with the advice I have received and that taken by my employer it will be OK. Thanks again for your input.

[someone]

Just noticed that the law on termination payments changes on 6th April.

No idea if this affects you but you should check - it might make sense to get the 30k tax free this year instead of next.