illustration of using pension contributions to minimise tax payable on redundancy payments

1. Tax year end opportunities
1 assumes higher rate taxpayer in England, Wales or NI and full personal allowance available
Option 1 - Sally receives full redundancy payment of £78,000 and makes a personal
contribution
£78,000 redundancy payment
£30,000 paid tax
free
£48,000 subject to tax at 40%1
£9,600 higher rate tax reclaim1
Sally receives in total £58,800 of redundancy payment after tax
£19,200 tax1
Sally pays £38,400 net personal
contribution with basic rate tax
applied by scheme £28,800 net cost to Sally1
£48,000 in pension
savings
Guidance points
• Process and delay in reclaiming higher rate relief.
• Check total personal contributions are tax relievable (up to 100% relevant UK earnings).
• Check unused allowance to carry forward as proposed contribution over annual allowance.
• Check tapered and money purchase annual allowances don’t apply.
• Note Employer NI £6,624 on redundancy payment over £30,000 effectively wasted.
• Tax-free personal allowance affected if taxable income exceeds £100,000.
£28,800 remaining

2. Tax year end opportunities
Option 2a - Sally agrees with employer to sacrifice £48,000 of redundancy payment
in return for employer pension contribution - employer retains NICs saving
£78,000 redundancy payment
£30,000 tax free
redundancy
Employer pays contribution of £48,000 and
retains NICs saving of £6,624 that would have
been payable on amount over £30,000
Sally receives
£30,000 tax free
redundancy payment
£48,000 in employer
pension contributions
Guidance points
• Must be sacrificed before becoming entitled to payment
• No tax payable on redundancy element
• No tax reclaim process or delays - effectively benefits from higher rate relief immediately
• No check against 100% of relevant UK earnings
• Check unused allowance to carry forward as proposed contribution over annual allowance
• Check tapered and money purchase annual allowances don’t apply
• Employer likely to be agreeable to sacrifice if retaining NICs saving.
Sally has given up
£28,8001 net after tax she
would have received if
she’d taken full
redundancy payment
1 assumes higher rate taxpayer in England, Wales or NI and full personal allowance available

3. Tax year end opportunities
Option 2b - Sally agrees with employer to sacrifice £48,000 of redundancy payment
in return for employer pension contribution - employer adds in its NICs saving
£78,000 redundancy payment
£30,000 tax free
redundancy
Employer pays contribution of £48,000 and adds
in NICs saving of £6,624 that would have been
payable on amount over £30,000
Sally receives
£30,000 tax free
redundancy payment
£54,624 in employer
pension contributions
Guidance points
• Must be sacrificed before becoming entitled to payment
• No tax payable on redundancy element
• No tax reclaim process or delays - effectively benefits from higher rate relief immediately
• No check against 100% of relevant UK earnings
• Check unused allowance to carry forward as proposed contribution over annual allowance
• Check tapered and money purchase annual allowances don’t apply
• Employer may be willing to add part of its NICs saving if not all.
Sally has given up
£28,8001 net after tax she
would have received if
she’d taken full
redundancy payment
1 assumes higher rate taxpayer in England, Wales or NI and full personal allowance available

4. Tax year end opportunities
Sally takes benefits immediately
Option 1 – personal
contribution
Option 2a – employer
contribution, employer retains
NICs saving
Pension
contributions £48,000
Option 2b – employer
contribution, employer adds in
NICs saving
£48,000 £54,624
Cost to Sally/what
Sally gives up
£28,800
(net cost after higher rate
tax reclaim)
£28,800
(net of tax, if redundancy
paid in full)
£28,800
(net of tax, if redundancy
paid in full)
£12,000 £12,000 £13,656PCLS
Difference £16,800 £16,800 £15,144
£36,000
Funds available to
provide income
£36,000 £40,968
1 assumes higher rate taxpayer in England, Wales or NI and full personal allowance available