Tax implications of taking redundancy

[AlwaysReadyForABlether]

I have chosen to take voluntary redundancy from the company I have worked for for over 20 years. I will get a payout which will allow me to do what I want for a while. But it definitely doesn't mean I can stop working for good.

Some people have suggested that I shouldn't get another job straight away because I will be hammered for tax.

Does anyone know what the tax implications are or where I can find out?

My DH took redundancy a couple of years ago which pushed his total annual earnings into the 50% bracket for that year. Everything he earned subsequently was taxed at 50%. Horrible!
Basically, the first £30K of your redundancy money is tax free, but anything over that is counted as taxable income and if that pushes your annual earnings into the next tax bracket, then everything you earn for the rest of the tax year will be taxed at that rate (including any savings interest)

Thanks for that helena. I've just checked the tax brackets and my redundancy payout is going to put me into the 40% range.
I'm not due to finish work until September so maybe I should take 6 months off and not start work again until April 2014.

Yes I think that as long as you can be sure of getting another job in the next tax year then it's definitely worth balancing the benefits of staying below the next tax bracket threshold against the risks of being out of the workplace for too long.
I wish you all the best and hope you enjoy your time off and whatever you decide to spend the money on

I know it makes sense but the thought of not working for six months scares me.
I might just try to get another job straight away and just accept the tax issue.

Personally I don't think this advice makes sense. It's like saying if you earn enough to be in a higher tax bracket you should only work part of the year to avoid paying so much tax. Please remember you only pay the highest rate on the amount over each threshold, not on your entire earnings, so you don't "lose" anything.

Yes, if you've got the money and fancy a break I'd say go and enjoy it but don't do it for tax reasons.

So if, for example, the threshold is £35k and I earn £36k - I would only pay the higher rate on the £1k?

This thread has seriously confused me and I'm an employment lawyer!! Lets start again, taking a redundancy payment will not affect your tax to any great extent unless you are getting a very high payment. How much is the redundancy payment and what is your salary?

Virgil I'm glad it's not just me!

My salary is £32k so I am still in the low tax bracket.
My redundancy payment is about £56k. I understand that the first £30k is tax free.

Well, the threshold this year is around £41,500. This is broken down as follows: first £9,440 at 0% (this is your personal allowance). The next £32,000 is taxed at 20%. So only if your income exceeds £41,500 will you be paying tax at 40% and even so only on the part that exceeds this £41,500. So if you earn £50,000 then only £8,500 is taxed at 40%.

It might be considering asking your employer to make an extra pension contribution for you directly into your scheme with part of your redundancy. You don?t pay any tax up front, only when you draw your pension, and that will be at basic rate for most people.

OK so you are getting a very high redundancy payment. Is that all redundancy payment or is some of it notice pay (potentially taxable depending on the wording of your contract)

If you take redundancy the first £30k of your redundancy payment can be made free of tax. The rest will be taxed.

So, assuming it is all redundancy payment and not notice monies, you are taking £26k over and above the tax free sum. This £26k will be taxed at the applicable tax rate. Given that we are at the start of the tax year, it is unlikely that this, added to the amount you have already earned will take you into the higher rate bracket but it does depend on how much you have earned this year.

It is possible to pay some into a pension as Rufello says and make it tax efficient that way.

I agree with timetogrowup. Its a bit strange to say that you shouldn't earn money because you will have to pay tax on it. Surely its better to have 60% of the money than nothing at all .

Are your employers asking you to sign a compromise agreement to access the voluntary redundancy money. If so, all this should be dealt with in the agreement.

We have lots of people taking redundancy at my company. Dont think if you dont work you will 'save' tax. You wont! Virgil is 100% right, if you are pushed into the 40% tax bracket then you will still have 60% in earnings.

Also, I think jobs come around when they come around! I dont think you will be able to decide what month of the year you will accept a role (unless of course your skills are in very great demand!)

Thanks for your input everyone.
To answer Virgil's questions - the amount I quoted is purely the redundancy payment. I won't be leaving until September and will be paid as normal until then.

I don't know anything about a compromise agreement. All I've been asked to sign so far is to confirm I want to take VR.