Reader Question: Is there any tax benefit in taking my redundancy earlier?

4 min Read Published: 14 Sep 2011

Get an answer to your financial question online Reader Question:

I am taking voluntary redundancy or early retirement on 31/3/12 (still awaiting figures before deciding which might be the best option). I currently earn £30,000 per annum and the redundancy lump sum will be around £50,000. I could bring forward my redundancy/early retirement date by up to 4 months and want to know if this would be a better option regarding tax implications?

My response:

When assessing your income tax liability you must consider the income you have earned across the entire tax year. Tax years run from 6th April one year to 5th April the following year.

So the 2011/12 tax year runs from 6th April 2011 until 5th April 2012. So if you are made redundant on 31/3/12 or 4 months earlier then any tax payable on your redundancy lump sum will be assessed in the same way i.e.

To use your example, £20,000 (taxable part of your redundancy payment) would be added to your income for the tax year so far (£30,000) and you would be liable for income tax in the normal way (part of it at the higher 40% tax rate). You do not have to pay National Insurance on this type of redundancy payment.

It follows then that if the redundancy payment was instead delayed until after 6th April 2012 then it would be assessed as being in the 2012/13 tax year. As you would not have had any other earnings at that point it (as I am assuming that you have no other sources of income) then you will not be a 40% income tax payer. You would then have time (namely the rest of the tax year) to manage your future income in order to pay as little tax on your redundancy payment as possible.

I cover this and other methods of mitigating tax in more detail in my post Reader’s Question – How can I avoid paying tax on my redundancy payment?

The other point to check with your employer is how the redundancy payment will be affected if you receive it earlier. Will it be smaller? Will it still qualify as redundancy or will it involve some sort of 'Payments in lieu of notice', which are are subject to income tax and National Insurance? (read my article Reader Question: How will my redundancy payment be taxed?

Also make sure that you speak to your employer and check that they have ensured that your redundancy fits the tax man’s criteria so that you don’t pay tax on the first £30,000. There have been anecdotal tales of employers failing to ensure criteria is met particularly when it is related to early retirement.

In any event your employer's accounting department should be able to ensure that the redundancy payment is made in as tax efficient way as possible so discuss your options with them.

I hope that helps

Damien

Money to the Masses

Website: www.moneytothemasses.com

Twitter: money2themasses

The material in any email, the Money to the Masses website, associated pages / channels / accounts and any other correspondence are for general information only and do not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation. See full Terms & Conditions and Privacy Policy

Looking for a financial adviser near you?

Do you need financial advice? An independent financial adviser can show you how to make the most
of your money. Find your nearest qualified and regulated adviser using this VouchedFor search tool.

Alternatively, Hargreaves Lansdown, one of the UK’s largest firms providing restricted financial advice, is offering a £200 John Lewis voucher* to new clients.

  1. Thank you for your very prompt response. I am unable to defer payment until the following tax year, plus by leaving up to four months earlier I will only loose those months of my reckonable service; PILON would not apply either. i suppose I was just wondering if it is actually workth working the last few months due to the amount of tax I will be paying. Basically I find anything to do with taxation completely confusing!

    1. Hi Kim,

      Click on this online PAYE tax calculator as you will find it helpful. If you enter in your gross salary it will tell you your net take home pay (monthly and annually) as well as your tax bill.

      If you enter your pro-ratad salary assuming you left in December plus the taxable part of your redundancy (£20,000) it will give you a breakdown of your tax bill. Then repeat the exercise assuming you work until the end of March 2012 and you will be able to see what the difference is in terms of tax

      Best Wishes

      Damien

Comments are closed.