Redundancy settlement, garden leave and tax

[AuntieBacterial]

Hi, hoping there might be someone much more knowledgeable than me that could guide me on how a settlement with my employer might be taxed.

If my role is eliminated at this point in the tax year, my (generous) redundancy settlement will push my gross income for the year into the 45% tax bracket, to around £125k and I think will also mean that I lose my personal allowance for the 2025/26 year which will mean I owe tax. It’s not going to be easy to get a new job so I want to ensure I can stretch the settlement to cover my bills for at least 12 months - this is not me just wanting to avoid tax for the sake of it. I fully appreciate I am lucky to get a generous redundancy settlement.

One option I thought might help would be if I got my employer to agree to put me on garden leave rather than going with a PILON payment now. That way I would get my normal salary paid up to April 25th (3 months notice), then get my redundancy settlement when my employment is terminated in April in the 26/27 tax year. So my income for 25/26 remains within the tax thresholds anticipated for this year’s PAYE deductions and I avoid a big tax bill for this year.

Is it as simple as this does anyone know?

Or would the fact my settlement relates to a period of employment that occurred in 25/26 and 26/27 even if it is paid in the next tax year it has to be accounted for in the 25/26 tax year - so I basically would be over the £125k limit for the year and face a significant tax bill?

I know the first £30k of the settlement would be tax free but I’m not sure if it still counts as income for tax purposes - any ideas?

There are higher financial costs for your company to do it by giving you gardening leave, as even if the “salary” comes from your redundancy package, your company will still have to pay their share of NI

can you put anything into your pension to off set the tax?

Does your employer provide legal and financial advice as part of the redundancy process? I had a set of pension calculations run and put a significant chunk of the payoff into my pension - I had them calculate the after-tax amount for multiple levels of contribution and it was really helpful to see the take-home amounts.

But if I put some of the payment into pension, it’s not then going to be accessible to pay my bills later in the year - assuming I can’t withdraw funds from my pension without costs etc. Or am I missing something?

My employer does not provide or pay for legal/financial advice.

The first £30k of redundancy payment is normally tax free in the UK. Does that help?

Hi I’m not a tax expert but I have been dealing with some redundancies and I think your garden leave option should work so that payment is in a different tax year. The tax year should relate to when the money is paid, not what it is for.

My understanding is that the first £30k is not ‘taxable income’ and so does not affect your tax band. Though of course, this should be checked/confirmed.

Yes - helpful if they will pay the redundancy into the next tax year especially if you struggle to find another job. But you’d have to still be employed until then. Def worth asking. The £30k is tax free. Not sure what the £125k limit is, lose personal allowance over £100k.

Thank you! I will ask. I thought the personal allowance limit tapered down beyond 100k, to zero at 125k.

ACAS are really good for redundancy.

i don’t know if it’s different in diff tax brackets. When I was made resundant… pilon and owed holidays was taxed. My 16 weeks redundancy was not.

The first £30k of (properly structured) redundancy payment is not taxable. BUT this is only the actual redundancy - not PILON, nor accrued holiday leave etc. So if the actual redundancy payment was £30k or above and you have no other income streams you should be back under £100k for income tax purposes.

Bur second calling acas and going through specific figures.

The only additional cost to your employer on putting you on gardening leave rather than PILON is that your benefits continue to run for those 3 months. It shouldn’t be an issue though.
Gardening leave Is preferable to PILON as an employee - it will mean on your CV that it show you worked there for 3 months longer which helps avoid longer gaps.
I actually think your employment contract needs to start that your employer can do PILON, so worth a read.
If you’re doing a settlement agreement route I’d recommend using this firm. I had an excellent experience with them. Your employer will need to pay the costs.

https://www.settlementagreement.com

My pension calculations were basically identifying the sweet spot as regards what I would be left with after tax - try tax calculators online to see what the deductions would be on varying levels of lump sum.

My company always want people off the books by the end of the tax year so they would not want to extend into a new tax year to make it easier for you. Not sure if it’s their NI or other benefits but they like to start the new year ‘clean’. Thinking about maybe it’s how their overheads appear on the balance sheet for end of year reporting and p/l and dividends etc and how it looks to investors.

@AuntieBacterial IANAL nor a tax expert but my understanding has always been receiving redundancy pay in April salary is the most advantageous tax wise and it actually makes sense not to work for the rest of the tax year if you can afford not to.

You are correct for each £2 earned over your £100k taxable pay you lose £1 of personal allowance. So £125k of taxable pay sees you lose the whole £12,500 personal allowance.

If you are paid redundancy then the first £30k is not taxable reducing your taxable pay.

What you need is your current payslip showing YTD (year to date) figures together with a breakdown of what you will receive e.g. notice period, holiday pay, redundancy. This will give you your gross pay then you deduct £30k to work out your taxable pay. These figures will help you work out tax in 2025/26 and 2026/27 tax years.

The best person to ask is your payroll team leader.

Thanks everyone for the help and @FWSsupporter for the detailed response which really has helped me get my head around how to approach and analyse the options.

* IANAL nor a tax expert but my understanding has always been receiving redundancy pay in April salary is the most advantageous tax wise and it actually makes sense not to work for the rest of the tax year if you can afford not to*.

If this is what happens - you receive your redundancy pay only in April - you can claim JSA as you've paid your NI stamp (this benefit is based on payment of NI stamp) and it is not means tested, but JSA is taxable benefit. JSA is £92.05 weekly