i am due to be made redundant from my workplace. currently the first 30k is tax free. However after this amt?

Question

Iit is taxable. I have been advised that i should ask my company to pay the amt of 30k into my pension as AVC'S as this cannot be taxed. It can then be withdrawn tax-free immediately. can anyone advise if this is true and how this works? Thanks

Answer 1

Are you over 55? If so maybe they are talking about the tax-free lump sum you get when you start taking pension benefits, and I guess it could work. Other than that, I can't see how it would.

There isn't a simple, suits-everyone answer to getting tax free cash in excess of £30k in a redundancy situation - if there was, nobody would ever pay tax on their payouts and the £30k exemption would be meaningless.

If it's a much larger sum of money, go and see a tax advisor. The initial interview should be free, they will ask you some questions about the amount of money, your circumstances and so on and then tell you whether there's anything they can do for you and if so how much it would cost. Then you simply weigh up the cost against the potential tax saving and see whether it is worth doing.

Make sure you get a clear idea of how likely it is to work. A reputable accountant will be honest with you on this one - it's not in their interest to make you believe that something's a dead cert when it isn't, as they don't want to get a load of grief from you if it goes wrong (nor do they want to get sued). If the chances are less than 95% then you will want to factor that in to your decision.

Ask about NIC as well - the possibility of saving NIC will be attractive to your employer and make them more likely to go along with anything that you need them to do in terms of putting the agreement into a certain format etc.

Answer 2

You will pay Tax at your marginal rate on anything over 30k no matter what you do with it.

You can pay a lump sum into your Pension fund (AVC SIPP or whatever) and your Pension Fund gets a Tax Rebate.

The MAXIMUM amount you can pay into your AVC is your entire salary (excluding the Redundancy payment).

So, if you will earn at least 30k (after Tax) this year then you can put 30k into your AVC, the AVC claims the 22% Tax back (and the AVC receives a total of £38,461)

If you pay Tax at the higher rate, then you can claim back the additional 18% in your annual Tax return (the max. you can claim == the amount of tax you paid at the 40% rate LESS the 22% already rebated to the AVC fund..)

Now the 'payout' bit.

If you are aged over 50, you can Retire from your AVC scheme and claim 25% Tax Free Lump Sum. Of course you will get a (much) reduced Pension (since you retired early) .. and (of course) now you are Retired you will not qualify for Job seekers Allowance etc. HOWEVER there is nothing to stop you from getting another job !

Note also that some Companies will not allow you to 'Retire' from AVC's only - they may well insist that you take your main Pension at the same time.

So instead you may have to transfer the AVC's into a SIPP = not only can you can still get the 25% Lump Sum but you can also leave the remaining money invested (instead of drawing a pension via a crap value 'annuity' -- NB. MAKE SURE you take up the 'Open Market' Option' if you decide to go the Annuity route))

Answer 3

The first £30,000 of your redundancy pay is exempt from tax and NIC - it does not have to be paid into an AVC.
See the guidance from HMRC at http://www.hmrc.gov.uk/guidance/redundancy-factsheet.pdf