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

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 6^th April one year to 5^th April the following year.

So the 2011/12 tax year runs from 6^th April 2011 until 5^th 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 6^th 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

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