Redundancy and 60% tax trap

Took similar redundancy a few years ago. Reduced the tax burden by putting an amount in my pension (30k iirc). Also employer kindly agreed to split payment across 2 financial years which at least meant if didnt find work the following financial years payment would attract less tax.  Also made sure that leaving date was when PILON expired not when left company which meant had more months employer contribution to pension scheme (6 months for me).  Good luck. The whole thing was quite liberating for me and went on to do much more rewarding things.

Edit: Just to add 80 PMs and Programme Managers went into consultation. 70 took redundancy. They were surprised but really didn't manage it well. Those that decided go, collaborated during the process, so any benefit identified was quickly shared among the "team".  Worth having some form of shared comms with others during the process.

that is a real dick move.. idealy you get paid in the following tax year..

have you got a sipp / pension you can put a bulk of the taxable income into, upto £60k

Could you just salary sacrifice ~90% of your pay into your pension for the next couple of months knowing that there's a fair sized windfall coming in the form of redundancy and PILON

I know that across the country, thats a really big number but we’re just normal folks with normal houses and families but working in Greater London area

So at least 2.2x the average London salary.  The statutory redundancy might be a shock when you see what a "normal" weeks pay looks like 😉

Thanks Andy - ive taken redundancy twice before so whilst I know it can be upsetting, I also know it will all be fine in time.

ideal scenario would be to take the payment after 6th April then once I get a new job, up the pension contributions there and backfill with the redundancy payout

You can't refuse PILON if there is a clause in your contract, but if there is not then I believe you can "insist" on being paid "normally".
When is payday?  Perhaps they are planning a special payroll on the 4th but that would be unusual.  You might want to check, but my understanding is, lets say pay roll is 30th March and 30th April then all of your 30th April payroll would be in the new tax year, even if it actually related to work only 1-4 April.  Of course they might simply pay you off earlier - but if they don't have time for their consultation and process they can't.  If you could afford to, you could still use pension to avoid a tax hit.

thisisnotaspoonFree Member
Could you just salary sacrifice ~90% of your pay into your pension for the next couple of months knowing that there’s a fair sized windfall coming in the form of redundancy and PILON

ive missed the boat for February pay run so all I could do is 100% of my March pay - no way to offset 3months PILON + bonus - and I wont even find out if im going until the very end of the process - even if I put my hand up

I assume they want folk gone by the end of the tax year. PS if it's statutory plus pay in lieu (exclude the bonus), statutory isn't much unless they do a week per year at going rate, but you are only paying the extra tax over on the money over and above the limit - e.g. £20k over the limit, that's 20% extra tax £4k.  Unfortunately, you earn it you pay it. Possible delay payment into 25-26 tax year certainly would help if out of employment for a while. Shoving into pension mean's you've not lost the funds, but it's not 'available' to you if you need it.

When we did it we collaborated with the process. Smooth business transition etc etc. The employer was much more amenable to be flexible about payment dates and other timings etc

you don't have to salary sacrifice to get below the 100k - you can pay into a private pension on the 5th april, and submit a tax return to claim your tax back. Its slightly less tax efficient this way (you lose the 1% national insurance) but it will still save you a tonne of cash.

The company is probably deliberately moving on the 4th april for some tax reasons on their side. I doubt that date is a coincidence

ahh hadn't considered a private pension - is there any way to spin up a private pension now, pay in a lump sum on April 4th then if the worst happens and I dont find a job by the time my savings run out, pull it out of the pension and pay back the tax saved?

ahh hadn’t considered a private pension – is there any way to spin up a private pension now, pay in a lump sum on April 4th then if the worst happens and I dont find a job by the time my savings run out, pull it out of the pension and pay back the tax saved?

Yes just open a SIPP there's some suggestions here if you scroll down a bit:

https://www.moneysavingexpert.com/savings/cheap-sipps/

If you want to open one now you'll probably have to put some money into it rather than leaving it empty - or just open one closer to the time.

*although I dont't think you can cash them out if you are under 55yo if thats a factor.

is there any way to spin up a private pension now, pay in a lump sum on April 4th

Yes you can do that.

then if the worst happens and I dont find a job by the time my savings run out, pull it out of the pension and pay back the tax saved?

No. You can't do that. Once it's in a pension you can't get it out until you are 55/57. And even then there are other things to consider.

ive missed the boat for February pay run so all I could do is 100% of my March pay – no way to offset 3months PILON + bonus – and I wont even find out if im going until the very end of the process – even if I put my hand up

No but you could tell them that IF you are made redundant you would like X of that paid to your pension rather than salary/pilon/bonus/redundancy.  It saves them employers NI so should be worth their while.

Check this but fairly sure with a sipp you can back date to...errr 2 or 3 years?  The idea is to allow someone with a small business to make big contributions in good years and spread the tax benefits of doing so across the lean years close by.

If I'm right on that the urgency diminishes somewhat.

I'd check when they're actually dating the payment and/or paying it.

Where I work the final payment is always in the last payslip, which is often after the actual leaving date - paid through the usual 4-weekly payroll.

I’d check when they’re actually dating the payment and/or paying it.

This - I have always had 2 or three payments for redundancy, PILON, unused leave etc, and been able to get them into the most advantageous tax year for me (both times made redundant in Mar/Apr).

Talk to your finance dept.

Just a thought…….if you open a SIPP in mid March and make a contribution, would there not be a cooling off period which could enable you to change your mind and extract the cash if necessary ?    Would need double or treble checking.

Thanks gents - most helpful

I think you can go back 4 years with pension contributions, so if you haven't already hit the £60k threshold in the last 4 years its worth going back and seeing what you can put in still.

Had similar situation a few years back. Dates were negotiated through the consultation process and were moved to following tax year with little fuss. If you don't ask, you don't get!

Like folks have said, ask for some payment in the new year. and consider paying enough into a SIPP out of your net income to reduce your taxable pay

if you hit the 50% additional tax rate with your one-off payment that’ll give you some fun in next year’s tax return. Especially if after your calculation you stay in it and see the magnificent £500 tax free interest limit drop to £0 for your easy access, not in an ISA, savings and current account earnings

The first £30,000 of redundancy pay is tax free isn’t it? I believe mine was back in the 2010s.  That should not count towards your taxable income.

other avoidance measures may help like, say, charitable contributions. You can make these in the new tax year but have them treated as though they were given in the last tax year.

I assume they want folk gone by the end of the tax year.

Tax year is irrelevant, they’ll be inclined to have it all in one financial year (ie when their accounts are prepared to).

You “should” be lucky if the date is 4th April, although it is technically in the current tax year, for all intents, HMRC take PAYE year to be from 1st April to 30th March.

If you look at any previous P60s, the values will tie in to that years April- March payslip totals. It won’t have adjustments removing 5 days at the start and adding 5 at the end.

With real time submissions, the latest a payroll dept can upload for a month’s PAYE reporting is the last day of the month so March’s will be Monday 31st. That should then close the month therefore the year for Tax.

They’ve said employment terminates on the 4th- did they say when you’d be paid? All redundancies I’ve seen & experienced have paid out at the normal pay day- ie end of month as it could incur extra cost to run 2 pay runs. Obviously there could be the risk they pay it all with March’s pay.

The first £30,000 of redundancy pay is tax free

Ah yes I had forgotten about that. I think I took 30K in one year, 40k the next (didnt work that year) and put 30k into my pension. 9 years ago, so memory hazy.

Tax year is irrelevant, they’ll be inclined to have it all in one financial year (ie when their accounts are prepared to).

Obvs depends on the organisation. My lot were faced with all their projects going to shit, so there was a compelling business case and they were very happy to manage it in a favorable way to keep PMs managing their projects. Everything is negotiable.

I was in a similar situation years ago

Final day of employment was March 31st 2018

Redundancy payment was physically made on April 30th 2018

Tax was based on when the payment was received, not when the employment ended, so even though my employment ended in the 2017/18 tax year, the tax on the redundancy pay was based on earnings in the 2018/19 year

I am in a similar position, my last day of employment being in Feb.  As I am now 60± this is probably the start of my retirement. I would suggest you get advice from a qualified tax accountant, whilst the Hive is a great source of knowledge and support, not all of the comments are current or correct.  Re the idea of setting up a SIPP, you may be able to make pension contributions for the past tax years depending on what tax was paid in those periods.  At the moment once you reach 55 you are able to draw down from your pension funds, some of which is tax free ( normally 25% of the total fund value ).

Good luck

Well it must be the season for it, I too have just had the discussion about potential redundancy, so something I need to be worrying about now.

I'm hoping the union will be able to provide some support re reducing potential tax burden, as getting a payout at the end of FY means potentially a huge tax bill, which you won't get any back if you are then out of work for the first half of the following FY

As above, ask about when the payment will be received, and if 4th April ask if they will move it. They should be able to flex.

The financial year end won't matter as the liability will be recognised in the books one way or another, irrespective of when they make the payment.

So definitely ask for some flex which would be less faff than trying to arrange a pension.

I had a similar redundancy a couple of years ago. Was made redundant on the 4th, but got paid in the next tax year so didn’t have to worry about tapered annual allowance. You may still have to claim some tax back if you are between jobs for a while. If the taxable portion paid in the new tax year is sizeable some of it will be taxed in the higher bands as payroll only allocate a twelfth of your annual allowance to the payment.

If you are paid on the 4th April itay be challenging to get that money into a SIPP before the end of the tax year. My pension provider has a cut off date for payments. Just in case you go that route....

Good luck! ?

You may be worrying over nothing. I got made redundant on the12th January last year but I didn’t get my money until February. There is a legal process to go through between uiu and a lawyer that will likely take a week or so.

Something definitely in the air. 52 soon 53 and expect to get redundancy notification in June and leave Septemberish. Good package of 2 years salary so trying to plan on best strategy. Thinking of putting as much as possible into pension and claiming back tax relief via SA but there must be another better way surely.

I had a similar ish thread to this myself. 51 yrs old, just been made redundant. Package £62k would take me over £100k in 1 tax year.

I spoke to our Financial Advisor and he advised against putting in to a pension. TBH the conversation was back In November so I cant fully recall why but it made sense at the time. One of the reasons was That basically I would not be able to access the money for 15 yrs.

I have asked my organisation to pay the redundancy at the start of next tax year, which unfortunately I doubt they will do.

@FunkyDunc that advice seems odd.  Yes, it may apply to your work scheme but there is nothing to stop you opening and paying into a SIPP which can be accessed at 55 (57 from April 28) which I'm surprised your advisor didn't suggest.

Edit- maybe matched contributions are a factor but I assume they will be capped?