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TonyTax
TonyTax, Tax Consultant
Category: Tax
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Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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all, Just looking , please. I am a uk air

Resolved Question:

Hi all,
Just looking for information, please. I am a uk air traffic controller who has just lost his medical licence to continue working. My company operates a loss of licence scheme which pays out 2 years salary in a lump sum if the employment is terminated because of medical reasons. I am about to be terminated and the company have agreed to pay out the lump sum. Because of the tax implications on the large amount ( lump sum and 3 months notice period is about £150000), I would wish the company to put about £110000 into my company pension using my unused pension allowance of this tax year, and the unused carry forward pension allowance of the last 3 years. There is plenty of allowance available.
My questions are
1) Could the carry forward pension allowance over the last 3 years be used in this case.
2) Would HMRC allow the large lump sum to be put into my pension.
3)Would there be a reason that HMRC would not regard the lump sum as earnings?
Submitted: 2 years ago.
Category: Tax
Expert:  TonyTax replied 2 years ago.
Hi.

1 To the extent that the lump sum is taxable as earnings, there is nothing to stop you sacrificing a sufficient amount of the payment to use up any unused allowance for the current input period and the three previous input periods.

2 Yes.

3 Assuming your contract of employment allows for such a payment, then it is taxable earnings as you have a right to it by reason of your employment.

I find it hard to believe that your employer does not have an in-house expert on pension schemes and how they work or access to external financial advisers to ensure that the company's pension scheme rules as well as the rules that affect all pension schemes are not breached.

You should read the notes here, here and here. If there is no inhouse pensions expert, you should consider consulting an independent financial adviser, particularly in regard to the lifetime alllowance rules and how they impact on your pension fund.

I hope this helps but let me know if you have any further questions.
Customer: replied 2 years ago.

Hi Tony,

Thanks so much for the reply. The company contract pension queries to outside sources.

Just to confirm Tony, my contract of employment states 2 years salary will be paid in the event of losing my medical licence through a loss of licence scheme. An insurer has paid the lump sum out to my employer who will pay me through PAYE. HMRC has confirmed that the lump sum will be taxable. I just wish to know if the lump sum be regarded as pensionable earnings so that I can put most the lump sum into the pension. I don't fancy being stung for tax later. I really appreciate all your help. Thanks

Expert:  TonyTax replied 2 years ago.
Have you been told that you won't pay tax on the first £30,000 of the payment? I would doubt that you have.
Expert:  TonyTax replied 2 years ago.
Your employer took out insurance against having to pay two salary to an employee who ceases to qualify to work as an air traffic controller which is entirely sensible from their point of view as, given the nature of the work, cases such as yours will occur.

The fact that your employer took out insurance is largely irrelevant as far as you are concerned. What is important is that you are entitled to the payment due to the existence of a clause in your employment contract and that makes it taxable as earnings. If it is taxable as earnings, then it is pensionable.

You said that your employer outsources pension queries. If I were you, I'd have an employment lawyer look at it if only to confirm what I've told you. You might be interested in the question posted by an air traffic controller and the answers here.
Customer: replied 2 years ago.

Hi Tony,

Thanks for the information confirming that the lump would be pensionable.

I had originally tried for exemption of the whole lump sum under the disability exemption EIM13630 (Hasted v Horner) as I had a mini-stroke.I could not work as an air traffic controller and was given my 3 months contractual notice period.

HMRC looked into all the documentation and my employment contract but said all was taxable as the loss of licence payment and the 3 month notice payment was contractual.

Thanks again

Expert:  TonyTax replied 2 years ago.
Thanks and good luck in the future. Let's hope you make a full recovery.
TonyTax and other Tax Specialists are ready to help you

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