What Should You Do With Redundancy Money?

Understanding your redundancy payment

When receiving a redundancy package, it’s important to understand the implications of receiving the lump sum and how to shelter it from tax.

The first £30,000 is tax free. Anything over this amount would be taxed at your higher rate and result in lost allowances and benefits, increasing the effective rate of tax for that year.

This includes your personal savings allowance, which might be reduced from £1000 to £500, or lost altogether if total income exceeds £150,000. Your personal allowance can also be reduced or lost and you may have to pay further tax at the end of the year as the amount deducted via PAYE is unlikely to account for the lost allowance.

For those currently receiving Child Benefit, the impact of the payment could mean it’s lost altogether. Child benefit is reduced if your adjusted net income exceeds £50,000 and is totally lost if it exceeds £60,000.

It’s important to consider other benefits you may lose in redundancy such as private medical insurance and income protection. You should speak with a financial adviser who can help find alternative protection policies for your peace of mind.

Consider paying your redundancy payment directly into your pension pot

 You can ask your employer to make a lump sum payment from part or all of your redundancy package into your pension fund rather than giving it to you directly. This could be a more tax efficient way to receive the payment and benefit from pension tax relief.

A £20,000 addition to pension savings comes at a net cost of £12,000 for a higher rate taxpayer and can help restore your personal allowance and allow Child Benefit to continue.

The prospect of redundancy can be difficult for many people but can also be seen as a welcome cash injection to savings or retirement planning. With the right tax planning, your retirement plans can even be brought forward.

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