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Personal Tax Implications

Personal Tax Implications

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A personal Tax Client ( PAYE Earnings 12/13 in excess of £ 100 K ) is to be made redundant within the current tax year.

As part of the package, it has been suggested that the Employer pays £ 30,000 directly into my client's Personal Pension Scheme as well as a "Cash Payment"of

£ 30,000. What are the tax implications for my client of the receipt into his pension pot of the £ 30 K eg. is the overall compensation treated as £ 60 K ??

Any advice on this one would be appreciated !

Replies (9)

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By Novakova
18th Nov 2013 20:54

Fat cat employment termination
Employer contribution to PPS is not taxable on the recipient, whereas the cash payment could well qualify for tax free compensation for loss of employment, provided various conditions are satisfied

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By Colinc
18th Nov 2013 21:50

For the employer contribution thee are rules on total payments which can qualify in any given tax year so although it is likely the £30 k will not be taxed you can't be sure without looking at all payments

Also oth areas like expectation and age ie EFRBS can impact other £30 k

Colin

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Stepurhan
By stepurhan
18th Nov 2013 23:01

Contract terms

The £30,000 redundancy exemption only applies where the payment does not arise from their employment contract. Check his original employment contract and the redundancy arrangements to see if you fall foul of this. If it's a contractual payment, it's all taxable.

Based on the details in your OP, they are set to receive a benefit of £60k, £30k in hand and £30k in their PERSONAL pension scheme. I can't see how a £30k payment into a personal scheme could be seen as anything other than additional compensation. The fact that it is being paid direct doesn't alter the fact that it is effectively £30k put completely in the hands of the employee because it is their personal pension. Am I missing something here?

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By Colinc
19th Nov 2013 06:43

Stepurhan, I think you are right that is in the hands of the employee but as long as it is then placed into a qualifying pension scheme and the payment is within the £50k annual allowance as adjusted for any unused £s bfwd previous years then it should qualify as effectively t ax free.

Pensions and redundancy are i think hard to simplify for forum posts ;-(

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By Steve Kesby
19th Nov 2013 07:23

It's not an exemption
If they don't get taxed elsewhere, payments and benefits received in connection with termination of the employment are taxable under s 403 to the extent that they exceed £30k.

The £30k pension contribution is exempt, but total payments and benefits received in connection with the termination are £60k, meaning that the £30k cash payment is taxable.

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Stepurhan
By stepurhan
19th Nov 2013 08:06

Is it redundancy?

The point I was making is that the first £30,000 is only tax-free if it is actually a redundancy payment. Depending on the original contract terms and the arrangments for leaving, this may not be the case. We are assuming that since the OP has said their client is being made redundant that they have checked this. I just wanted to ensure they have.

Whether the pension contribution is effectively tax-free or not, independently of the redundancy, will depend on other factors, which Colinc has briefly outlined.

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By MBK
19th Nov 2013 12:21

@Steve

Surely the £30k into the pension scheme is (or could very easily be structured to be) excepted by ITEPA S407, so doesn't count as a benefit for the purposes of S403?

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By Paul Soper
19th Nov 2013 12:47

Two elements

The payment into the scheme, provided it is registered will not cause a problem as long as it, together other contributions made by the employee and the employer, in aggregate, do not exceed the £50,000 limit plus the amount of any shortfall in the use of the £50,000 limit in the three previous years so it seems most unlikely that this "Top-Hat' contribution, as they used to be called,will have tax consequences.  It is important that it is paid directly as if it is, as some have suggested, placed in the hands of the employee first it will attract tax relief but not NIC relief, so it needs to be paid in directly.

Some of the £30,000 separately paid will be statutory redundancy provided that the necessary conditions are satisfied and that will always be exempt, the remainder sounds as though it is a contractual settlement of the employment contract which will be taxable as an emolument and so will not qualify for the £30,000 exemption - although 30 years ago the belief was different - and the amount involved is clearly designed to attract the exemption, it can only arise where it is not derived from the contract, even if you call it redundancy, or a payment in lieu - the exemption can really only arise where there is a breach of the employment contract by the employer and that cannot be the case where the contract is terminated by agreement.

There is no harm, however, in contacting HMRC before the payment is made for guidance from them as to the appropriate treatment, as their employer manual suggests, because if they accept that the exemption does apply, notwithstanding the above, then you are quite safe to pay it gross and it will be unlikely to be challenged.  Most tribunal cases arise where a payment is made without revenue guidance and someone attempts to argue, after the fact, that it is not taxable, more often than not unsuccessfully.

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By Steve Kesby
19th Nov 2013 13:46

@MBK

Agreed, although I think you probably mean s 408? I hadn't looked at my legislation and was going from memory this morning. I was unaware of the exceptions in s 407 and s 408.

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