How can I best invest my £100,000 redundancy payout?
I have just been offered voluntary redundancy and will receive a payment equal to three years' salary (approximately £100,000 before tax) plus payment in lieu of notice.
Can you let me know what the tax implications would be for me? I am currently a basic-rate taxpayer and my husband is a higher-rate taxpayer. Any advice on how best to protect and invest the cash, so I can use it to receive a steady income would be appreciated.
Any redundancy pay up to £30,000 is tax-free. Any non-cash benefits that form part of your redundancy package, such as a company car will be given a cash value and added to your redundancy pay for tax purposes.
By the sound of things, your payment will be more than £30,000, so some of it will be liable for tax. Your employer will usually have deducted the tax but there's a high probability they won't have taken off the right amount. You may need to claim tax back or pay extra tax. Holiday pay, pay in lieu of notice, wages owing and bonus payments – if these are due to you under your contract of employment – don't count as tax-free redundancy pay. Tax and National Insurance contributions will be deducted as usual from these payments before you get them.
As for investing the payout to give income, Patrick Connolly suggests that after paying off any debts and ensuring you have an emergency cash fund in place, you could consider some riskier investments. He says: "Most people are best suited by holding a diversified investment portfolio including shares, fixed interest and property, in proportions to meet their objectives and attitude to risk. If you want to generate income then focus on income-producing assets such as UK and global equity income funds."
He adds that you should look to hold your investments as tax efficiently as possible. For most people a combination of pensions, and ISAs are suitable in providing both tax-efficiency and flexibility.
Paul Hutchinson is founder of Hutchinson Legal & Associates in Bristol, specialising in wills and inheritance tax planning.
A scheme originally established in 1944 to provide protection against sickness and unemployment as well as helping fund the National Health Service (NHS) and state benefits. NI contributions are compulsory and based on a person’s earnings above a certain threshold. There are several classes of NI, but which one an individual pays depends on whether they are employed, self-employed, unemployed or an employer. Payment of Class 1 contributions by employees gives them entitlement to the basic state pension, the additional state pension, jobseeker’s allowance, employment and support allowance, maternity allowance and bereavement benefits. From April 2016, to qualify for the full state pension, individuals will need 35 years’ of NI contributions.
The tax levied on the total value of your estate after you die. IHT has to be paid by the beneficiaries of your estate before they can receive any of the money from it. The money can’t be taken from the value of the estate _– it has to be paid before any money can be released. There is an IHT threshold – known as the “nil-rate band” – below which no tax is levied (£325,000 in 2011/12). Any amount above the nil-rate band is subject to tax at 40%. If your estate totals £600,000, there is no tax on the first £325,000; however your estate will pay 40% tax on the remaining £275,000, a total of £110,000. Prudent tax planning can reduce your IHT liability, so always consult a specialist solicitor.