Understand how redundancy pay affects your tax
People facing redundancy will normally be entitled to statutory redundancy pay if:
- They’ve made enough National Insurance Contributions (NICs)
- Have been working for your current employer for at least 2 years
When receiving a redundancy lump sum the first £30,000 will be free of tax and National Insurance. Payments of more than £30,000 will be taxable as will holiday pay, pay in lieu of notice and any other amounts that are payed out for work rather than compensation. This could push your into a higher tax band and result in lost allowances and benefits.
The order of taxation means that the redundancy package can push savings income, dividends and capital gains into higher rates, because these all sit on top of earned income. The personal savings allowance might also be reduced from £1,000 to £500, or lost altogether if total income exceeds £150,000. In the current tax year, personal allowance is wiped out when adjusted net income exceeds £125,000. Child benefit is reduced if adjusted net income exceeds £50,000 and is totally lost if it exceeds £60,000.
The standard pension annual allowance is £40,000 but can be tapered down to a minimum of £4,000 if you are a high earner. You don’t want to be caught out due to the size of your redundancy package. For this tax year, if your threshold income is more than £200,000 and adjusted income is more than £240,000, your annual allowance will be reduced. The reduction is £1 for each £2 of adjusted income over £240,000.
Advising on how tax impacts on your finances and ways to utilise allowances is the sort of thing a Chartered Financial Planner will advise you on.
Contact a financial adviser today