redundancy will lead to a large pay out - do I need advice?

[FinAdvice]

I'm being made redundant. Due to time served, a generous redundancy package, LTIs, bonus etc I'm going to be taking home a very large amount in Feb. It's going to be about £375k. I think around £30k-£40k is tax free. So that means about £345k is taxable. This is going to vary based on stock prices and bonus amounts

I've never been close to this income bracket before. So it's new to me. I've just realised this might affect my pension contributions, I might end up getting taxed on them. So this could be the year to not pay in. Quote below... Learning about how it affects my pension made me realise that there might be other things to consider.

Do you know what are the gotchas related to tax and investments at this income level?

Thanks

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About tapered annual allowance for pension contributions.....
"How does the tapered annual allowance work?
Anyone who meets the income requirements above will see their annual allowance gradually reduce by £1 for every £2 of ‘adjusted income’ above £260,000.
For example, if your adjusted income was £280,000 your annual allowance would be reduced to £50,000.
This ‘tapering’ stops at £360,000, so everyone will retain an allowance of at least £10,000. "

Yup be careful on the pension. Try to limit your total pension contributions in this tax year (ie before April 2025) to £10k or you could get stung. That includes employer contribution. Sell the company shares as soon as you can. You’ll almost certainly pay 47% tax on a big chunk of it, and lose your tax-free annual allowance, so assume the post-tax figure will be about half of the pre-tax figure. Also, you’ll need to do a self-assessment tax return next year.

Beyond that, think about what you want to do with the money. Is it to spend now, pay down debt, or invest for the long term? That will affect where you put it. You’re lucky that you have time to think about this before you receive the money.

Thanks, why would you sell the shares as soon as possible? The company is doing well, I'm just not needed. I thought maybe it's best to delay selling until the 25/26 tax year, when I'll go back to being at a 40% tax payer. Or I might not get another job, in which case I wouldn't be paying income tax on employment, which should keep my rate pretty low?

1. Redundancy Payments and Taxation

• Tax-Free Portion: The first £30,000 of a redundancy payment is typically tax-free in the UK. Anything above this amount is subject to income tax.
• Income Tax on Redundancy: The remaining £345,000 will be added to your income for the tax year, which could push you into the highest tax brackets. This could mean paying 40% or 45% income tax on the majority of this amount.
• National Insurance Contributions (NICs): While the tax-free portion of your redundancy is exempt from NICs, any taxable redundancy payment may still be subject to NICs.

1. Pension Contributions and the Tapered Annual Allowance

• Tapered Annual Allowance: As you mentioned, the tapered annual allowance reduces the amount you can contribute to your pension tax-free if your adjusted income exceeds £260,000. With an income of around £345,000, your annual allowance will likely be reduced significantly, potentially to the minimum of £10,000.
• Impact on Pension Tax Relief: Contributing more than your tapered annual allowance could result in a tax charge, effectively negating the tax benefits of the contributions.
• Planning Consideration: Given the tapering, this might be a year to minimize pension contributions or use alternative tax-efficient vehicles like ISAs.

1. High-Income Child Benefit Tax Charge

• If you or your partner receives Child Benefit and your income exceeds £50,000, you may need to repay some or all of it through the High-Income Child Benefit Charge (HICBC). With your income level, you would likely have to repay the full amount.

1. Capital Gains Tax (CGT)

• If you decide to invest a portion of your redundancy payment, be aware of the CGT implications. The annual CGT allowance is currently £6,000 (for the 2023/24 tax year). Gains above this amount will be taxed at 10% or 20%, depending on your income level.

1. Investment Income

• Dividend Tax: If you invest in stocks or funds, any dividends received could be taxed at 8.75%, 33.75%, or 39.35% depending on your total income.
• Savings Income: Interest on savings accounts above your Personal Savings Allowance (£500 for higher-rate taxpayers, £1,000 for basic-rate taxpayers) could also be subject to tax.

1. Additional Considerations

• Annual Tax on Enveloped Dwellings (ATED): If you invest in property through a company structure, be aware of ATED, which applies to residential properties worth over £500,000.
• Inheritance Tax (IHT): If you plan to gift a significant portion of your redundancy payment, consider the seven-year rule for IHT on gifts.

1. Seeking Professional Advice

• Given the complexity and the amount involved, it would be wise to consult with a financial advisor or tax specialist who can tailor advice to your specific situation. They can help you optimize your tax position and ensure you don’t miss out on any opportunities or fall into potential traps.

Conclusion Receiving a large redundancy payment comes with several tax considerations, especially when it pushes your income into higher brackets. The tapered annual allowance for pensions, potential loss of child benefits, CGT on investments, and other income taxes are crucial areas to manage. Professional advice will be essential to navigate these complexities and make the most of your windfall.

The pension tapered allowance is the most important factor so stay under £10K including any employer contribution. Failing to do so will result in paying tax on the rest but it’s not the end of the world. However if you haven’t used all your pension limit in recent previous year, you might be able to use that.
You can go back to contributions in the following tax year.
i would have a different view to a previous poster on the shares. I’d keep them and sell within the capital gains tax allowances (£3K pa) or if they don’t make a profit and you want the cash. For instance, if at Grant date they were £100 each and they’re now £99 each, you don’t need to pay CGT. Do work out the Grant date for each tranche though.
It’s a good nest egg for sure!

Thanks, I have allowance left over from previous years as I come contribute close to the maximum amount. So perhaps the pension contributions is one you watch and be mindful of over the next few years but might not tangibly affect me. I'll look in to that

Oh. I'm being made redundant soon. My payout will be over £260k.

Looks like I really need some tax advice...