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bigduckontax, Accountant
Category: Tax
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At the end of last year I was made redundant and I received

Customer Question

At the end of last year I was made redundant and I received a compensation payment. As part of the agreement I wanted to put £25k into my pension so that I wouldn’t have to pay tax on it. It has now transpired that due to pension scheme rules they cannot put the money into my pension and the company wants to pay me directly. I am still out of work. Should I get the company pay me directly the full amount and I pay the tax to the HMRC or should I get the company to pay me via their payroll with an emergency tax code and I claim back the tax afterwards as I wouldn't have an personal allowance?
Submitted: 3 years ago.
Category: Tax
Expert:  bigduckontax replied 3 years ago.

Hello, I'm Keith and happy to help you with your question.

 

There is no problem here. The first 30K of a redundancy payment is tax free. Here is HMRC advice on the subject as there can be odd sums added to the compensation payment which may bring the total up over 30K, albeit unlikely in your case. I must say HMRC couldn't make it more complicated if they tried, it is only when you read the example that the meaning becomes clear! The 'EIM' quotes are HMRC's published information sheets.

 

'Before the £30,000 threshold (see EIM13505) is applied, it is necessary to add together all the payments and benefits within Section 401 ITEPA 2003 that are made to, or in respect of, the same person in connection with:

 

The same office or employment and

 

Different offices or employments with the same employer and

 

Different offices or employments with associated employers (see EIM13540).

 

The threshold is then applied to the total. This ensures that only one £30,000 threshold is applied for that total.

 

For example, a director is dismissed from two separate employments with associated employers, receiving £25,000 in each case within Section 401 ITEPA 2003. The aggregated total received is £50,000 and only one £30,000 threshold is available against that total.'

 

As I said I don't think you have to concern yourself about HMRC's caveats, your redundancy payment will be tax free. As an Australian would say 'No worries, sport!'

Customer: replied 3 years ago.

To clarify; My total compensation was close to £120k. I wanted to put £25k of the £120k into my pension as it would be tax free, otherwise I would have to pay 50% tax on the £25k, as my total income would be gone over £150k for the 2013/2014 tax year. Now the company has come back to me and has advised that due to the rules of the pension scheme, they cannot put the £25k into my pension. I am trying to ensure that I don't end up paying 50% tax on the £25k. As I am out of work I do not have a PAYE code.


 


Am I better off asking them to pay me the full £25k to me directly and I pay the tax and NI to the HMRC as a self employed person or can I get a new tax code even though I am not in work, but this will allow the company to take off the tax and NI from the £25k?


 


thx,


Colin

Expert:  bigduckontax replied 3 years ago.
Sorry, I misunderstood your position. At your level of remuneration you will be over the NI higher limit anyway. If you go down the self employed route you have to pay 2 classes of NI, whilst under PAYE only Class 1. I would suggest PAYE the wiser route.

You could reduce your tax exposure by making contributions to a pension fund. Such contributions top slice your income or tax. However, overall contributions, including any made by your employer on your behalf, cannot exceed 4oK in the current tax year, but you can carry back to absorb unused allowance, 50K last year and unlimited before that up to 100% of earned income. If you use a SIPP for this you can go back 3 years which might provide a very valuable concession.
Customer: replied 3 years ago.

Ok so PAYE is the wiser route. Should I apply for a new PAYE code since the old one is no longer correct (there was car and fuel benefits as well as no personal allowance) I presume that since I am no longer employed by the company and out of work then I should have the 1000L PAYE code? Or should the Company tax me on an emergency tax code?

Expert:  bigduckontax replied 3 years ago.
The emergency code is actually the basic personal allowance, ie 1000L. If they tax you at a full 20% deduction under PAYE then you may be in a reclaim position at the year's end and, anyway, in your case being unemployed, you could apply for partial refund during the tax year by writing to your tax office. It's really as long as the proverbial piece of string, or six of one half a dozen of the other.
bigduckontax, Accountant
Category: Tax
Satisfied Customers: 3612
Experience: FCCA FCMA CGMA ACIS
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Expert:  bigduckontax replied 3 years ago.
Thank you for your support.

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