TAX ON REDUNDANCY

[Dominio]

Hi

I am being made redundant from the NHS in the next couple of months. I will get 2 years salary as have worked for >30 years. This will total approx £80k.
My annual salary currently is £43k so currently a basic rate tax payer.

My understanding is the first 30k is tax-free, tax will therefore be payable on £50k.

Am I correct in assuming that by receiving the payment in this current tax year, most of the 50k will initially be taxed at the higher rate? see below

By the time I receive the redundancy I will have worked approx 10 months of current tax year - i.e. approx £36

Thus approx 14K will be taxed at 20%
Approx 36K will be taxed at 40% ??

I have calculated tax liability as £15,800?


I am aware of 1 way of reducing the tax liability by putting in a pension e.g SIPP (which I have already).

Could anybody explain how the tax relief will flow on putting in the SIPP?

Will I automatically get 20% on a certain amount - what will that amount be (have only put in £1600 this year into SIPP)

On the remaining amount (whatever that is) will I have to fill in a tax return form via HMRC (which I do not usually do as PAYE)

Hope that makes sense.

Are there any other ways of avoiding or reducing the tax liability?

[robbob]

Am I correct in assuming that by receiving the payment in this current tax year, most of the 50k will initially be taxed at the higher rate? see below
By the time I receive the redundancy I will have worked approx 10 months of current tax year - i.e. approx £36
Thus approx 14K will be taxed at 20%
Approx 36K will be taxed at 40% ??

It depends on your tax code but i would expect the answer would be yes generally speaking- in theory if you are on week one code it could partly be taxed at 45%. I would also expect that you are over taxed in that your personal allowance is not given for future tax periods as hmrc keep that aside for later pay periods so you will receive less at 20%

I am aware of 1 way of reducing the tax liability by putting in a pension e.g SIPP (which I have already).

Could anybody explain how the tax relief will flow on putting in the SIPP?

Presuming there are no adverse tax charges due to you exceeding relevant limits and you are making contribution direct as an individual then you put 80p cash into sipp hmrc adds 20p into sipp resulting in £1 invested.
To the extent that you are paying higher rate tax hmrc will then reduce your year end tax liability by 20% of that £1 gross invested in the sipp.

Practicably speaking you get 25% of the cash sum you put into sipp back as a tax refund if fully higher rate. I.e 20p back on 80p cash invested. the two sets of 20p make 40% of total sum added into sipp.

On the remaining amount (whatever that is) will I have to fill in a tax return form via HMRC (which I do not usually do as PAYE)

Probably not needed unless you have other income on which tax needs to be paid. Note you can advise hmrc of pension payments made and projected income and they will update your tax code as appropriate - just ensure you are clear pesnion payments are one off so you dont end up with wrong future code.

Note the main dangers here lie in exceeding allowable pension contributions - nhs often doesn't tell you you pension input amount till after tax year has ended - if your year end taxable income exceeds 100k - or if you are partner are claiming child benefit. Any of those 3 issues could trigger an adverse tax consequence.

[Dominio]

thanks for the reply.

It looks like with my current salary - payable until end of feb. 2020 plus the approx 80k redundancy payment, this will exceed 100k for the tax year. What are the implications for that, to which you mentioned in your reply

[Dominio]

not sure i understand your point as follows:
Practicably speaking you get 25% of the cash sum you put into sipp back as a tax refund if fully higher rate. I.e 20p back on 80p cash invested. the two sets of 20p make 40% of total sum added into sipp.

[Dominio]

anybody aware of other vehicles (part from pension) to avoid tax. I assume their may be VCTs but high risk?