Advisers should be aware that spreading redundancy payments could be considered tax avoidance for tapered annual allowance purposes by HM Revenue & Customs, an expert has said.
Speaking on Wednesday (September 11) at the inaugural FTAdviser Financial Advice Forum in London, Claire Trott, chartered financial planner and head of pensions strategy at St. James’s Place, explained that quite often redundancy payments are spread over a couple of tax years to reduce the individual’s tax bill.
She said: “We know the first £30,000 isn’t taken into account, but if the payment is significant enough, the member may want to have part of this payment paid after the end of the tax year.
“This isn’t a new thing to do, it would reduce any large tax bill that may have been payable because it would push them into the next tax bracket.
“However, if it were to also avoid pushing them into tapered annual allowance territory it could be argued that this was the reason for it and then the anti-avoidance measure should kick in.”
When the government introduced the rules for the tapered annual allowance in 2016, it also implemented anti-avoidance legislation so that taxpayers can’t game the system.
Ms Trott explained that one of the measures looked at moving income from one tax year to another in order to increase the annual allowance in one of the years and said it was yet another unfair outcome of the tapered annual allowance legislation.
She added: “[Redundancy payment] isn’t going to be a regular increase or something that could be repeated for many years avoiding the tapered annual allowance each year.”
Ms Trott noted to avoid any queries from HMRC, advisers and their clients should not spread payments over several tax years for purposes of the tapered annual allowance calculation.
The tapered annual allowance was introduced in 2016 and has caused a headache for many professionals since.
It gradually reduces the allowance for those on high incomes, meaning they are more likely to suffer an annual tax charge on contributions and a lifetime allowance tax charge on their benefits.
The taper means that for every £2 of adjusted income above £150,000 a year, £1 of annual allowance will be lost.
FTAdviser reported on August 7 that HM Treasury will be reviewing the impact of the tapered annual allowance, after doctors have been campaigning to scrap it for months.
It emerged in December that the number of members leaving the NHS Pension Scheme was five times higher than that seen by other public pension funds, most likely because of the taper on the annual allowance.
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