Will you pay higher rate tax on your redundancy pay?

Q I am due to be made redundant shortly. Around April 7, I will receive a redundancy payment of ?77,000, less basic rate tax above ?30,000, and then receive a pension of around ?25,000 per year.

Will I have to pay additional higher rate tax in due course on my redundancy pay above ?30,000, even though I will not be a higher rate taxpayer as far as my pension is concerned?

A Unfortunately, the answer is that you will be liable to pay some higher rate tax on some of the redundancy payment.

Basically, what happens is that the redundancy money, over ?30,000, is treated by the Inland Revenue as if it were earned income and added to your (pension) income in the relevant tax year - 2002/2003 in your case.

That means that a fair proportion will come into the higher tax bracket, although you should remember that the personal tax-free annual allowance (currently ?4,385) is deducted first when calculating your taxable income.