Tax advice of the week: Get relief on severance pay

If a P45 lands on your desk, it pays to know how to make any severance package tax-efficient, says Emma Simon in The Daily Telegraph.

"As a rule, don't agree or disagree with the initial departure terms offered." Ask for a written proposal so you have time to consider what you want.

The first £30,000 of any payment is tax-free. If you are a higher-rate taxpayer, try to make sure this is paid after you receive your P45 and not before: this way anything over £30,000 will be taxed at just 20% and you will have a further year to pay any tax owed. Also consider asking for part of your payment to be made directly into your pension. Since it will not attract national insurance, you may be able to negotiate a better deal.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Don't forget "two other potentially very valuable reliefs", said The Schmidt Report. If you retire from your job because of injury or disability (mental as well as physical), there is no ceiling on the tax-free sum.

A person who can no longer work because of stress, for instance, could "in principle... receive an unlimited payout tax-free". The second exemption is where the employee's service included working abroad. "The corresponding proportion of any termination payment is excluded from tax as well."