Emotions and tax of potential redundancy
THE last 18 months has been a difficult time both financially and psychologically. Most of what matters to us emotionally has been taken away: needing to be with people; security; widening our experiences through travel and meeting people; looking after our friends and family and vice versa. I could go on for a while.
Business owners and companies have learned a lot about their ability to operate in the most appalling conditions and with more flexibility, resilience and skill than they thought possible.
Many have taken on loans and will soon have to make repayments. Some are struggling to make their staff return to work and some will simply not have work for staff to return to.
Faced with the great potential of further lockdowns given the increasing cases and counter-intuitive strategies of allowing everyone into close contact at a football match, such uncertainty and cost is already too much for companies who, post furlough will probably look to redundancies.
A job (well, an enjoyable one) fulfils many needs, both from a financial security point of view and also an emotional point of view. Its where you are stretched, where you have meaning and purpose, where you have some sense of daily achievement, where you have autonomy and control, where you feel part of a team, where your sense of status is in social groupings (I am a really good barman at x pub, replaced by ‘unemployed’ has quite a dink in the psyche).
Further redundancy stress varies from: the feeling of not knowing if you can pay your bills to; making complicated decisions regarding your redundancy at a time of heightened emotion.
Here are a few tips for you to consider if you are being made an offer of redundancy/retirement. Google: ‘what are the human givens’ to see what you are giving up emotionally. It’s important and will help you make clearer unemotional decisions.
From a financial point of view, look at how you can take your redundancy from a tax efficiency point of view. Certain elements of a redundancy are tax free, and others are not.
Taking your redundancy tax inefficiently could see your tax on savings jump from 0 per cent to 40 per cent, your capital gains tax jump from 10 per cent to 20 per cent, dividend income increase of 7.5 per cent to 38.1 per cent and property increase from 18 per cent to 28 per cent.
Similarly, child benefit can easily be wiped out if the redundancy is added to the income for the year.
Let’s consider an example of ways of tax efficiency in taking that payment. The first £30,000 of the redundancy element (after payment in lieu of notice and salary/bonus/holiday pay which is hit by income tax, employee national insurance of 12 per cent and 2 per cent, and employer national insurance of 13.8 per cent) has no income tax or national insurance to be taken.
After that, there is an income tax and employer tax of 13.8 per cent.
An employee can always make an election to reduce their taxable income via what is called a salary sacrifice. Instead of taking a £10,000 bonus, for example, the employee could elect for the employer to make the pension contribution direct to a pension, saving the national insurance and lowering the income for tax and impact on the above taxes and benefits.
On top of this, the employee can request from the employer that they redirect their national insurance contribution saving to the pension. After all, they will be saving 13.8 per cent, so there is no loss to them to do so. Most good employers would do that automatically. In a normal salary/bonus scenario there is a 12 per cent employee and 13.8 per cent employer national insurance to be gained.
For redundancy payments, depending on your income, you will need some advice from your accountant and independent financial adviser as to how much you should sacrifice or pay personally as certain tax issues could be triggered.
Remember also the actual tax breaks, which are achieved by placing the money into a pension in the first place. So, an £8,000 contribution will be topped up to £10,000 for a basic rate taxpayer, whereas a higher rate tax payer’s net cost will be just £6,000 and an additional rate tax payer will effectively be £5,500.
:: Peter McGahan is chief executive of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. If you have a financial query, call Darren McKeever on 023 8064 9674, email firstname.lastname@example.org or visit www.wwfp.net.