Shamefully easy tax question.

[Fido]

Be gentle with me, my ignorance of tax matters is astounding.

I currently earn around 25,000 UKP, so pay basic rate tax of 22%. Come
March, I'll be made redundant, and the redundancy payment will be high
enough to put me in the higher rate tax bracket, by quite a margin.

It's been suggested to me that it would be to my advantage to try and defer
payment of the redundancy lump sum until the next tax year (only a few days,
in practice), but I'm not 100% sure why - if I receive it in this tax year,
does that mean I would then pay back tax at the higher rate on the money
I've already been paid?

Obviously I'm going to be paying higher rate tax on the majority of the lump
sum (after the first 30K) one way or another, but if I can reduce the total
liability it's got to be worth a shot.

Thanks in advance,
F.

[Marcus Fox]

Post by Fido
It's been suggested to me that it would be to my advantage to try and defer
payment of the redundancy lump sum until the next tax year (only a few days,
in practice), but I'm not 100% sure why - if I receive it in this tax year,
does that mean I would then pay back tax at the higher rate on the money
I've already been paid?

Not sure what you mean here. You can earn about £4500 without paying any
tax. The next £2000 or so will be charged at 10% tax, and so on through the
22% and 40% bands.

You will not be charged 40% on the entire amount of your income just because
you earn over the 40% tax threshold, you will only be charged 40% on the
amount that's over it.

Marcus

[Jonathan Bryce]

Post by Fido
Be gentle with me, my ignorance of tax matters is astounding.
I currently earn around 25,000 UKP, so pay basic rate tax of 22%. Come
March, I'll be made redundant, and the redundancy payment will be high
enough to put me in the higher rate tax bracket, by quite a margin.
It's been suggested to me that it would be to my advantage to try and
defer payment of the redundancy lump sum until the next tax year (only a
few days, in practice), but I'm not 100% sure why - if I receive it in
this tax year, does that mean I would then pay back tax at the higher rate
on the money I've already been paid?

No, but if after your redundancy, you are going to be out of work next year,
then you will more of your basic rate band available for the taxable sum.

Post by Fido
Obviously I'm going to be paying higher rate tax on the majority of the
lump sum (after the first 30K) one way or another, but if I can reduce the
total liability it's got to be worth a shot.

[Matti Lamprhey]

Post by Fido
Be gentle with me, my ignorance of tax matters is astounding.
I currently earn around 25,000 UKP, so pay basic rate tax of 22%.
Come March, I'll be made redundant, and the redundancy payment
will be high enough to put me in the higher rate tax bracket, by
quite a margin. [...]

But as long as the redundancy payment is non-contractual and below
around £25K (might be more?), there isn't any liability to tax on it. I
think that's right, but corrections are welcome.

Matti

[Jonathan Bryce]

Post by Matti Lamprhey
But as long as the redundancy payment is non-contractual and below
around £25K (might be more?), there isn't any liability to tax on it. I
think that's right, but corrections are welcome.
Matti

Read the question carefully ...

"Obviously I'm going to be paying higher rate tax on the majority of the
lump sum (after the first 30K) one way or another, but if I can reduce the
total liability it's got to be worth a shot."

[Chris]

Post by Jonathan Bryce

Post by Matti Lamprhey
But as long as the redundancy payment is non-contractual and below
around £25K (might be more?), there isn't any liability to tax on it. I
think that's right, but corrections are welcome.
Matti

Read the question carefully ...
"Obviously I'm going to be paying higher rate tax on the majority of the
lump sum (after the first 30K) one way or another, but if I can reduce the
total liability it's got to be worth a shot."

I can I made redundent by your employer please :)

[Fido]

Post by Chris

Post by Jonathan Bryce

Post by Matti Lamprhey
But as long as the redundancy payment is non-contractual and below
around £25K (might be more?), there isn't any liability to tax on it.

I

Post by Chris

Post by Jonathan Bryce

Post by Matti Lamprhey
think that's right, but corrections are welcome.
Matti

Read the question carefully ...
"Obviously I'm going to be paying higher rate tax on the majority of the
lump sum (after the first 30K) one way or another, but if I can reduce the
total liability it's got to be worth a shot."

I can I made redundent by your employer please :)

Be my guest, but you'd better be quick!

F.

[GSV Three Minds in a Can]

Post by Fido
Be gentle with me, my ignorance of tax matters is astounding.
I currently earn around 25,000 UKP, so pay basic rate tax of 22%. Come
March, I'll be made redundant, and the redundancy payment will be high
enough to put me in the higher rate tax bracket, by quite a margin.
It's been suggested to me that it would be to my advantage to try and defer
payment of the redundancy lump sum until the next tax year (only a few days,
in practice), but I'm not 100% sure why - if I receive it in this tax year,
does that mean I would then pay back tax at the higher rate on the money
I've already been paid?
Obviously I'm going to be paying higher rate tax on the majority of the lump
sum (after the first 30K) one way or another, but if I can reduce the total
liability it's got to be worth a shot.

Depends whether you expect to be employed again real fast next year, or
if you are going to be off work for a while. If the latter, then you can
use your next year's tax allowances against the lump sum (past 30k), and
pay 'some at 0%, some at 10%, some at 22%' tax instead of 'all at 40%'.
Of course if you are likely to earn just as much in 2005/6 as in 2004/5
then it makes never-no-mind anyway.

I doubt that you can defer 'part of the redundancy payment', but you can
probably defer all of it. Just work your notice or something. As long as
it's not too obviously a tax dodge ..

The other option is to just forgo some amount of redundancy pay (this is
your employer being nice after all, there is no legal requirement for
them to pay that much), and then your nice employer might just (in a
compeltely unrelated act of charity) toss it into a pension fund for you
instead. No tax at all. Of course you then can't get it until you
retire, and have to spend 75% on an annuity ... but if you are facing a
40% tax bill, and are near retirement age anyway, it might still come
out as a good deal.

[Fido]

Post by GSV Three Minds in a Can

Post by Fido
Be gentle with me, my ignorance of tax matters is astounding.
I currently earn around 25,000 UKP, so pay basic rate tax of 22%.

Come

Post by GSV Three Minds in a Can

Post by Fido
March, I'll be made redundant...

<snip>

Post by GSV Three Minds in a Can
Depends whether you expect to be employed again real fast next year, or
if you are going to be off work for a while. If the latter, then you can
use your next year's tax allowances against the lump sum (past 30k), and
pay 'some at 0%, some at 10%, some at 22%' tax instead of 'all at 40%'.
Of course if you are likely to earn just as much in 2005/6 as in 2004/5
then it makes never-no-mind anyway.

Thanks, I think that clarifies things nicely - now I can explain myself when
I'm crawling to HR, begging for a deferal.

F.

[Ronald Raygun]

Post by Fido
Thanks, I think that clarifies things nicely - now I can explain myself
when I'm crawling to HR, begging for a deferal.

Harry Ramsden?

[GSV Three Minds in a Can]

Post by Ronald Raygun

Post by Fido
Thanks, I think that clarifies things nicely - now I can explain myself
when I'm crawling to HR, begging for a deferal.

Harry Ramsden?

Human Resources. It's what Personnel Departments like to be called these
days.

[Ronald Raygun]

Post by GSV Three Minds in a Can

Post by Ronald Raygun

Post by Fido
Thanks, I think that clarifies things nicely - now I can explain myself
when I'm crawling to HR, begging for a deferal.

Harry Ramsden?

Human Resources. It's what Personnel Departments like to be called these
days.

I wish someone would take them to the HR (Human Rights) court to make
them desist from using such an overtly degrading term. The idea
that staff are thought of as mere resources is utterly repugnant.

[Andrew MacPherson]

The idea that staff are thought of as mere resources
is utterly repugnant.

I agree, it's a terrible phrase, and so out of keeping with
today's ridiculously touchy-feely office language. But it
seems to go along with titles such as "People Manager" in
today's workplace. I do my best to annoy such "people people"
by using unfashionable terms like wage slave and personnel,
but they don't like it up 'em.

Andrew McP

[Michael Mause]

The next tax year starts April 6th - more than a few days away
However, if you can get paid after that date - perhaps under a separate
consultancy agreement - it will save you 40% tax depending on your earnings
next year and you will pay 10%, then 22% (after your personal allowance
currently £4745.)
Note - the £30,000 redundancy must not be contractual, otherwise it is part
of your taxable income.
Also, a taxman could say that if they pay you next year you were not really
redundant.

Advice given freely, but it's just a non-actionable comment.

Post by Fido
Be gentle with me, my ignorance of tax matters is astounding.
I currently earn around 25,000 UKP, so pay basic rate tax of 22%. Come
March, I'll be made redundant, and the redundancy payment will be high
enough to put me in the higher rate tax bracket, by quite a margin.
It's been suggested to me that it would be to my advantage to try and defer
payment of the redundancy lump sum until the next tax year (only a few days,
in practice), but I'm not 100% sure why - if I receive it in this tax year,
does that mean I would then pay back tax at the higher rate on the money
I've already been paid?
Obviously I'm going to be paying higher rate tax on the majority of the lump
sum (after the first 30K) one way or another, but if I can reduce the total
liability it's got to be worth a shot.
Thanks in advance,
F.

[Fido]

Post by Michael Mause

Post by Fido
Be gentle with me, my ignorance of tax matters is astounding.
I currently earn around 25,000 UKP, so pay basic rate tax of 22%.

Come

Post by Michael Mause

Post by Fido
March, I'll be made redundant, and the redundancy payment will be high
enough to put me in the higher rate tax bracket, by quite a margin.

The next tax year starts April 6th - more than a few days away
However, if you can get paid after that date - perhaps under a separate
consultancy agreement - it will save you 40% tax depending on your earnings
next year and you will pay 10%, then 22% (after your personal allowance
currently £4745.)
Note - the £30,000 redundancy must not be contractual, otherwise it is part
of your taxable income.

Gotcha, when I said it was a matter of a few days, I meant from my last day
of service, which will be the end of March. I wonder what my chances
are of persuading them to keep me on, unpaid for a week...

Thanks to all,
F.

[Tim]

I wonder what my chances are of persuading
them to keep me on, unpaid for a week...

Quite good, I'd have thought - they'd get a whole week's work out of you for
nothing!!

[GSV Three Minds in a Can]

Post by Michael Mause

Post by Michael Mause

Post by Fido
Be gentle with me, my ignorance of tax matters is astounding.
I currently earn around 25,000 UKP, so pay basic rate tax of 22%.

Come

Post by Michael Mause

Post by Fido
March, I'll be made redundant, and the redundancy payment will be high
enough to put me in the higher rate tax bracket, by quite a margin.

The next tax year starts April 6th - more than a few days away
However, if you can get paid after that date - perhaps under a separate
consultancy agreement - it will save you 40% tax depending on your

earnings

Post by Michael Mause
next year and you will pay 10%, then 22% (after your personal allowance
currently £4745.)
Note - the £30,000 redundancy must not be contractual, otherwise it is

part

Post by Michael Mause
of your taxable income.

Gotcha, when I said it was a matter of a few days, I meant from my last day
of service, which will be the end of March. I wonder what my chances
are of persuading them to keep me on, unpaid for a week...

If they owe you vacation, insist on working it instead of getting paid
it in lieu. That's what I did .. of course I was sort of making myself
redundant, (last man out and all that) so I didn't have too much trouble
convincing myself. 8>.

[Fido]

Post by GSV Three Minds in a Can

Post by Fido
Be gentle with me, my ignorance of tax matters is astounding.

If they owe you vacation, insist on working it instead of getting paid
it in lieu. That's what I did .. of course I was sort of making myself
redundant, (last man out and all that) so I didn't have too much trouble
convincing myself. 8>.

Good idea, but they're insisting that all leave is used by the last day.
I suppose appealing to their better nature is out of the question ;o)
F.