Pension contributions & tax on lump sums
You may know that it is possible to have tax free compromise agreement pension contributions. If you are trying to find out how exactly to pay money into your pension scheme as part of your compromise agreement settlement, then you have come to the right place. If you want to find out how much you should get for your compromise agreement, try our Compromise Calculator.
You are probably already aware that the first £30,000 ‘ex gratia’ payment is normally tax free, above which the balance will be subjected to income tax and NI deductions just like a salary. You will also find that you can’t pay over £50,000 into the pension scheme in total for this tax break to be applicable so check how much you’ve paid in already.
Every pension scheme is different, and we would advise that you contact your specific pension provider to ask them what their rules are on paying in tax-free lump sums. One common feature across all providers is that if you have a compromise agreement in place, you are normally allowed to pay in a lump sum tax-free. You can then draw this money down during your retirement in instalments in the usual way. This is particularly useful if you are nearing retirement age, and your compromise agreement settlement amount is over £30,000.
One very complicated case which we did recently involved a government backed pension scheme. We contacted them and it transpired that they had a calculator to tell you exactly how much you could put in and how much you could get out.
Our client was able to pay in around £20,000 in return for a monthly payout increase of £1,250. The next highest increment was more than our client was to receive, so he paid in the most he possibly could. In the end he received around £32,000 ex gratia as well as £21,000 into his pension, and around £1,500 was paid directly to Compromise Agreements Ltd as his representatives, based on a small percentage of the deal which we negotiated for him.
Thus he only paid tax on the £2,000 of the ex gratia payment above the £30k tax free limit. Had he not used us to represent him, not only would he have received a much smaller payout, but he would’ve paid a lot more tax to boot! It is a very handy fact that legal fees can be paid at source by the employer so if the total ex gratia sum is above £30,000, then at least you won’t be paying tax in relation to your legal fees.
The pension scheme required a letter or a form to be filled out by the employer confirming that our client was still in pensionable employment. This means that it was crucial to ensure that the EDT, or effective date of termination of employment, was after the date when the lump sum would be paid
to the pension scheme. Given that in compromise agreement situations, the EDT is normally prior to the payout of lump sums, this point required some negotiating and working closely with the employer.
In the end we agreed to extend the EDT to around 21 days after the last day of being salaried, by changing the employment contract to a zero hours contract. This is obviously quite technical stuff, and if you are going to receive over £30,000, you would do well to seek some professional advice to ensure you get the best deal and make the most tax savings.
In other cases the employer organises the payment direct to the pension provider and there is no need to go through complicated application forms or worry about date of termination of employment.
As set out on our Representation page, often we would be able to offer you representation in return for a percentage of any extra amount which we negotiate for you, so you can t lose. To find out if you qualify for a free no obligation chat with our employee experts call us on 0800 533 5134, email us on info@compromiseagree.com or fill in the message box on the right.
