No one likes to lose a job, but should the worst happen, be prepared. Redundancy payments of up to £30,000 made outside an employment contract are tax-free. Anything above that will be taxed at your marginal tax rate, says the Wealth Protection Report. But it is possible to delay a ‘termination receipt’ until a later tax year. This could be a good idea.
If, for example, you don’t find another job, and have little other income, you’re likely to fall into the lower tax band (assuming you were a higher-rate taxpayer while employed), potentially saving you income tax. Or perhaps you’re expecting to crystallise a trading loss in the next tax year that could then be offset against other income, including your severance payment.
The law states that anything received as a termination payment is “employment income in the year in which it is received”, so do get the timing of the payment right. Provided there’s no entitlement to receive it in the current tax year, and you won’t require it to be paid early, the parties involved can agree the payment will be made later.