Sacrifice or Swap Redundancy Pay for Pension Fund Payment Instead
Published / Last Updated on 24/07/2024
Sadly, many people get made redundant each year. To qualify for a redundancy payment, you must have been working for your current employer for 2 years or more.
As a Statutory Minimum, under Redundancy Pay Rules, you are entitled to:
- Half a week’s pay for each full year you were under 22.
- One week’s pay for each full year you were 22 or older, but under 41.
- One and half week’s pay for each full year you were 41 or older.
- The first £30,000 of any redundancy payment is tax free; any excess is taxable as ‘relevant income’.
This may result in a smaller, statutory minimum or a larger payment if your employer offers more than the statutory minimum.
Redundancy Pay More Than £30,000
For many with redundancy payments of more than £30,000, you will either pay income taxes on the excess over £30,000 or you may ask your employer if you can sacrifice the excess and ask for it to be paid into your pension fund as an employer contribution.
- This will make no difference to your employer’s expenses other than possibly saving employers national insurance contributions.
- Any redundancy sacrifice is paid into your pension fund without income taxes being due.
There are two routes to paying redundancy payments into pension:
Route 1: Sacrifice
- Ask your employer to sacrifice some or all your payment and pay it into your pension fund. Result: No tax payable.
Route 2: Employer Will Not Sacrifice – You Pay into Pension
- If your employer does not offer or will not offer redundancy pay sacrifice into pension, then income taxes will be deducted from any excess over £30,000.
- You can still recover this excess income tax paid by personally paying into a pension fund and getting tax relief on your contributions.
Route 2 Example Dave’s Redundancy Package (Dave was made redundant in Summer having already earned income £20,000 between April and Summer)
- £5,000 - Salary for the month (this is relevant earnings and taxable).
- £10,000 - PILON (Payments in Lieu of Notice), 2 months notice pay (this is relevant earnings and taxable).
- £5,000 - Holiday pay outstanding, 4 weeks holiday accrued, (this is relevant earnings and taxable).
- £120,000 - Redundancy Payment (£30,000 is tax free, £90,000 is relevant earnings and taxable).
- Totals
- £30,000 Tax Free Redundancy Payment
- £130,000 Relevant Earnings (and taxable) for the year.
How much can Dave pay into a pension?
The annual allowance (the maximum you/your employer can pay into a pension each year) is the lower of:
- £60,000 or
- Your salary for the year (relevant earnings)
- This means Dave (and his employer) can only pay up to £60,000 in this tax year.
Carry forward of unused tax relief means that Dave/Employer can pay up to £60,000 this year into a pension but also carry back for up to 3 years unused relief.
- 2024/25 - £60,000 Annual Allowance less £10,000 pension contributions already paid by Dave/Employer into all pensions = £50,000 unused allowance. Current tax year allowances must be fully used 1st.
- 2023/24 - £60,000 Annual Allowance less £10,000 pension contributions already paid by Dave/Employer into all pensions = £50,000 unused allowance.
- 2022/23 - £40,000 Annual Allowance less £10,000 pension contributions already paid by Dave/Employer into all pensions = £30,000 unused allowance.
- 2021/22 - £40,000 Annual Allowance less £10,000 pension contributions already paid by Dave/Employer into all pensions = £30,000 unused allowance. Oldest tax year then used 1st for carry forward.
- Total unused allowance £160,000.
Total unused annual allowance including current year and 3 years carried forward of unused allowance = £160,000.
The maximum you can pay into a pension fund (including carry forward) is what you have earned i.e., your total relevant earnings. Dave’s Relevant Earnings = £130,000.
Therefore, the maximum gross that Dave could pay into pension in the current tax year is £130,000 gross. If he had made no contributions (as part of the £10,000 pa existing contribution to pension) then Dave can:
- Write a ‘net’ cheque to the pension company of £104,000.
- Tax relief at source £26,000.
- Gross contribution by Dave of £130,000.
- Unused pension allowances of £160,000 less £130,000 meaning Dave has unused carry forward as follows for tax year 2025/26:
- 2024/25 - £60,000 Annual Allowance less £10,000 pension contributions already paid by Dave/Employer into all pensions plus £50,000 paid in carry forward exercise = no unused allowance remaining.
- 2023/24 - £60,000 Annual Allowance less £10,000 pension contributions already paid by Dave/Employer into all pensions plus £20,000 paid in carry forward exercise = £30,000 unused allowance remaining that can be carried forward to tax year 2025/26.
- 2022/23 - £40,000 Annual Allowance less £10,000 pension contributions already paid by Dave/Employer into all pensions plus £30,000 paid in carry forward exercise = no unused allowance remaining.
- 2021/22 - £40,000 Annual Allowance less £10,000 pension contributions already paid by Dave/Employer into all pensions plus £30,000 paid in carry forward exercise = no unused allowance remaining.
Redundancy with combined pension payments and carry forward of unused allowances can be complex. Contact us for help and advice.
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