What to Do With a Redundancy Payment
A redundancy payment can be a significant sum of money. For some people, it may be the largest single amount they have ever received. While it might be tempting to spend it straight away, taking time to consider your options could benefit you in the long run.
Before making any decisions, work out exactly how much you are entitled to receive. Your employer should provide a breakdown, but you can also check the statutory redundancy pay rates on GOV.UK or use a redundancy pay calculator to estimate your entitlement.
Find out how much statutory redundancy pay you could be entitled to. Enter your details and get an estimate in less than a minute.
Try our Redundancy Pay Calculator free, here on this site →Understanding the Tax Position
The first £30,000 of a redundancy payment is typically tax free, though this depends on the nature of the payment. Certain contractual entitlements or payments related to work performed may not qualify for this exemption. Any notice pay, holiday pay or other earnings included in your final payment are taxed as normal income, separate from the redundancy element.
If your total qualifying payment exceeds £30,000, the amount above this threshold will be subject to income tax. This can come as an unwelcome surprise if you were expecting to receive the full amount.
One option for reducing tax on larger payments is to ask your employer to pay some of the money directly into your workplace pension. Employer pension contributions of this kind are not subject to income tax or National Insurance, provided they fall within annual allowance limits. Be aware that the annual allowance covers all pension contributions from you and your employer combined, and higher earners may face tapered limits. Your employer does not have to agree to this arrangement, but many will consider it if you ask. A financial adviser can help you work through the specifics.
Your situation may be slightly different. ask a question below ↓ and our editorial team will reply with our advice.
Pension Contributions and Planning
Putting some of your redundancy money into a pension has potential tax advantages, but it only makes sense if you will not need access to the money for some years. Pension savings are generally locked away until you reach age 55, rising to 57 from 2028 depending on your date of birth. Earlier access may be possible in cases of severe ill health.
You can also make personal pension contributions and receive tax relief on them. The amount you can contribute depends on your earnings and the annual allowance, which you can check on GOV.UK. If you have unused allowance from previous tax years, you may be able to carry this forward.
For those approaching retirement, it may be worth reviewing your overall pension position. MoneyHelper, the government backed guidance service, offers free pension information and can help you understand your options.
Other Ways to Use the Money
If you are between jobs, you may need some of your redundancy payment to cover living expenses while you look for work. Keeping a portion in an easy access savings account gives you flexibility. A common rule of thumb is to hold three to six months of essential expenses as an emergency fund before committing money elsewhere.
Paying off high interest debts, such as credit cards or loans, will often save you more than you would earn from most savings or investments. Once debts are cleared, you will have more freedom to invest the remainder.
If you have an emergency fund already in place and no expensive debts, you might consider investing some of your payment for the longer term. Options include ISAs, which allow you to save or invest up to a set annual limit without paying tax on interest or gains, general investment accounts offering more flexibility but without the same tax benefits, and Premium Bonds from National Savings and Investments where your capital is secure and you enter a monthly prize draw instead of earning interest.
The right choice depends on your circumstances, your goals and how comfortable you are with risk. Individual situations vary widely, so consider speaking to a financial adviser before making significant decisions. You can find a regulated adviser through the Financial Conduct Authority register or services like Unbiased.
I am being made redundant on 12th June, with a redundancy payment £125k.
I understand that £30k is tax free. This means I will have to pay tax @ 40% on £95k (125-30)=£38k.
I am 50 yrs old and I cannot make a large tax free lump sum into my pension pot & take it subsequently. I will have to wait until
Age 55 to get the 25% lump sum payment.
Is there any other way I can minimise the tax to be paid. Please share with me. Regards
Thanks.
Lato
My role will cease to exist 31/01/17.
What am I entitled to and can I ask for extras such as loss of pension etc and I will be 55 3 weeks after the mentioned date.
me and my partner with 4 children live in a council property. I get child Tax credit, she also works 25 hrs a week.
When I get the redundancy pay will I still get these benefits and can I also claim for other benefits e.g. housing/council tax until I find work or do I have to use this money to pay for the rent and council tax.
The reason I'm asking this is that I have other creditors that I would like to clear and it won't leave a lot left.
This means the money will come to us post tax.
What is the simplest way, with minimum handling fees, to take out a new second pension to put this one and only taxed redundancy monies into, to then later take it out as some sort of pension drawdown. Particularly how does one then go about getting back the tax paid on that money? It would be simplest if the tax was automatically reclaimed and added to the pension pot I opened ?
Thanks very much ?
I know the first £30 k is tax free but was wonderig what is the best way to avoid paying tax on the rest? I need about £17 k to pay off some debts.
Hope you can help and thanks.
My last day was today. Who do I inform first. I'm in a right pickle!
I am being made redundant after 18 years and am receiving almost £52k redundancy Plus a number of share perks will also be released (one of which I will pay tax and Ni on).
In addition to this I have the possibility of starting a new role directly after I finish at the end of the year.
Which with the redundancy would mean I receive an annual taxable amount of £120k this year (no idea where it all goes) . I am concerned that this will have a massive negative impact on my tax allowance for next year.. would the best option to place all of the amount over the (£30k) tax free limit from my redundancy into my pension pot thus keeping me just under what appear to be the £100k trigger point?
Whilst I appreciate this is a lot of money in comparison to many, I would still rather not give HMRC more than I have to, if I can leveraged my Pension.
Ask Redundancy Expert a question
Ask our editorial team a question and we will reply with our advice. Tell us as much about your situation as you can: the more detail you give, the more useful our answer can be.
You do not need to use your real name. Please do not include your full address, phone number, email address, or the names of other people. We may edit or remove identifying details for privacy and legal reasons.
Comments are moderated before publication.