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bigduckontax, Accountant
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I have a redundancy payment of £80,000 which is being made

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I have a redundancy payment of £80,000 which is being made by my company to my pension directly.
My 2014/2015 earnings were £110,000 so I have £40,000 tax allowance remaining for that year plus I carried over remaining tax allowances for the last 3 years and in total it adds up to more than £80,000 which will to enable me to pay no tax on the £80,000 tax contribution to my pension.
I am currently unemployed so I have no earnings and will probably have no earnings for the next tax year.
My question is if my old employer miss the deadline of 5th April 2015 to pay the £80,000 into my pension will I then be liable to pay tax on the contribution. Is my contribution tax relief limit now the lower of my earnings (£0) and £40,000 per year (EG £0). My follow up question is can I use some of the unused allowance from the previous years or is the contribution limit bounded by my zero earning?
bigduckontax
Hello, I'm Keith and happy to help you with your question. The news I bring is like the Curate's egg, good in parts.
Your redundancy payment is liable to income tax at your marginal rate save for the first 30K which is tax free.
The maximum contribution which can be made to a pension in the current tax year is 40K including contributions by employers. There is also a limit of 100% of earned income. Last year the limit was 50K, 50K the year before, 50K the year before that and 255K before that, but always with the 100% limit. If you have SIPP you can go back to mop up any unused allowance from prior years. Contributions over the annual limit can attract horrendous tax consequences.
You need to be very careful here to avoid breaching limits. I appreciate that little time is left, but you may need to approach your past employer as to what has actually been done.
I do hope I have shed some light on your position.
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Here are the pension carry forward rules for pension contributions [source Aviva]

'Quite simply, unused annual allowance from the three previous tax years may be used to increase your client’s available annual allowance for the current tax year.

Taking the earliest carry forward year first (year 1), you reduce the annual allowance by the pension input amounts that applied to that tax year.

If this leaves a positive balance, your client may carry that balance forward to the next tax year (year 2).

Your client will need to perform the same exercise for the middle (year 2), and most recent carry forward year (year 3).

Any remaining balance is the amount which they may carry forward to increase their current annual allowance.

Transitional arrangements applied for tax years 2008/09, 2009/10 and 2010/11 as the annual allowance for those years was above the notional £50,000 level used for carry forward purposes. In these transitional years, any inputs above £50,000 are ignored for carry forward purposes.'

I hope that makes matters a little clearer. Please remember that both employer and employee contributions are aggregated for limitation purposes.

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Customer: replied 3 years ago.

Thank you for the reply.

My problem is that my old employer has not yet made the pension contribution that I requested. I had £110,000 redundancy EG £30,000 tax free and £80,000 pension contribution (my salary was £110,000 and I had sufficient carry over from the previous 3 years to accommodate the £80,000 contribution) but I do not think my previous employers are going to be able to complete this pension contribution before the end of the tax year (5th April 2015).

I therefore have 3 other options if they fail to complete the best option of a pension contribution before 5th April 2015.

1) Get them to pay remaining £80,000 redundancy as ordinary income in this tax year (Before 5th April)

2) Get them to pay remaining £80,000 redundancy as ordinary income in the next tax year.(After 5th April)

3) Let them pay the remaining £80,000 into my pension after 5th April 2015 (but as I have zero income this is a very bad option - I would like to know how bad this option will be to assess the worst possible case)

Thanks in advance for your assistance,

Patrick.
I cannot see how, Patrick, if your employer cannot transfer the 80K to the pension fund before the end of the 1415 tax year, how they can manage to do same as income! You don't want income at that level as it would put you into the 45% tax bracket and up there pension premium reliefs are not valid at that high level. Of course if you do receive it as income before the end of the tax year you could pay it into the pension fund yourself or maybe start a new one.
If paid into a pension fund in the 15/16 tax year when you have no income, unless your brought forward unused pension contribution levels will cover, your flexibility may be squeezed.
i feel that you should lean very hard on your employers to get than money into the pension fund by the end of the current tax year. You have 4 working days left to manage this as Easter blocks off Good Friday.
I do hope you can manage this.
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Customer: replied 3 years ago.

Thank you for your reply.

There is part of your reply that I do not understand

"If paid into a pension fund in the 15/16 tax year when you have no income, unless your brought forward unused pension contribution levels will cover, your flexibility may be squeezed."

It is my understanding that with zero income I cannot make use of bought forward unused pension contributions from previous years since my tax free contribution limit is 100% of my income which is zero therefore only allowing me the zero income limit of £2880 allowance next year. Please confirm if my understanding is correct

I will obviously pressure my old employer to make the pension contribution before 5th April which is clearly the best option for me, but mindful that the worst case for me is that if they miss that date (because they are incompetent) then I will hit the worst case scenario of a pension contribution after 5th April with me on zero income. I may therefore be better asking them to block any pension payment and simply pay it as income since then I can still benefit from pension contributions either before 5th April (In my second private Sipp account) or after 5th April. This gives me less risk exposure if my old employer screws up.

Finally I would like to understand your assessment of the most beneficial of the 3 remaining options to me from my previous reply (reproduced below). I would also like to quantify how bad this worst case scenario might be in terms of tax exposure percentage.


"I therefore have 3 other options if they fail to complete the best option of a pension contribution before 5th April 2015.


1) Get them to pay remaining £80,000 redundancy as ordinary income in this tax year (Before 5th April)


2) Get them to pay remaining £80,000 redundancy as ordinary income in the next tax year.(After 5th April)


3) Let them pay the remaining £80,000 into my pension after 5th April 2015 (but as I have zero income this is a very bad option - I would like to know how bad this option will be to assess the worst possible case)"

Thanks in advance for your assistance,

Patrick

Yes, but if they pay the 80K as income in 15/16 then 40K of that can be paid by you into a pension fund and the balance use up brought forward allowances. Here is Ross Martin, Tax Consultancy explanation which I think yuo will find useful:
http://www.rossmartin.co.uk/sme-tax-news/801-pensions-carry-forward-of-unused-allowances
The only danger is that the three year ambulatory nature of the brought forward rules may leave you with inadequate brought forward entitlements to mop up the other 40K.
With this approach you do not breach the 100% rule either.
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Customer: replied 3 years ago.

Thanks again for your reply this is excellent information.

Just a few last details.

1) How much difference is there between a pre April 5th income payment (where I could funnel the who lot into a SIPP prior to 5th April and get some 40% and some 45% tax relief on the contribution and a post April 5th pension contribution where a higher percentage of the contribution would be at 20% tax relief?

2) What are the horrendous tax consequences of a massive over contribution direct to my pension but in 2015/16 from my ex employer? Is it worse than having to pay standard income tax on all amounts over £2880 assuming I have zero income. (EG first 10,000 tax free, next £32,000 at 20% and all remaining up to £80,000 at 40%

All this excellent assistance is much appreciated.

Thanks in advance,

Patrick

You don't get tax relief on pension contributions if you are in the 45% tax bracket. Well you do, but it is limited.

Here is the Gov UK's guidance on the matter:

'If you pay 45% Income Tax You can only claim tax relief on the extra 25% in your Self Assessment tax return if you pay Income Tax at the 45% rate.'

If you exceed the allowance then you will be taxed at your highest marginal rate on the amount over the Annual Allowance.

I do hope I have helped. Please be so kind as to rate me before you leave the Just Answer site.

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Thank you for your support.
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Customer: replied 3 years ago.

No problem, was well earned.

I hope my company can pay the contribution before 5th April, fingers crossed.

After talking with you my preferred fall back option is to have them pay the remaining £80,000 redundancy as income in the 2015/2016 year and them claim back pension contribution tax relief up to my limits from there.

Thanks again Keith,

Cheers,

Patrick.

Delighted to have been of assistance, Patrick.

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