If you’re facing redundancy, you probably have plenty of questions about the future – not least whether you will owe tax on the package you’re offered.
So, what are the tax implications around redundancy payments?
What is redundancy and redundancy pay?
You may be made redundant if your employer decides to reduce its workforce.
This could be due to a lower volume of work and is often connected to instability in the wider economy.
Redundancy pay is the lump sum you’ll receive, and it is mandatory for companies to make a minimum redundancy payment to employees who qualify.
Provided you’ve had at least two years of continuous employment, you would be eligible for statutory redundancy pay, but some employers may pay more. This is known as enhanced redundancy pay.
How is redundancy pay calculated?
Statutory redundancy pay is based on your salary, age and how long you’ve been with your employer.
Here’s how the sum is calculated:
One and a half week’s pay for each complete year of service in which you were aged 41 or over.
One week’s pay for every complete year of service in which you were aged 22 to 40.
Half a week’s pay for each complete week of service in which you were under 22.
There is a maximum limit to the amount of statutory redundancy pay you can receive, set at £19,290, and the length of service you’ll be paid for is capped at 20 years.
The weekly rate of redundancy payment is currently capped at £643 gross per week.
With enhanced redundancy pay, your employer can pay more than the legal minimum or reduce the qualifying period of two years.
If this is the case, it will be set out in your employment contract, or agreed during redundancy negotiations.
What about the notice period?
The notice of redundancy period is determined by your length of service.
If you’ve worked for a company from two years to 12 years, you get one week’s notice for each year of service.
If you’ve worked for over 12 years, the notice period is capped at 12 weeks.
It’s important to remember that if you’ve worked for less than two years for a company, you won’t be entitled to statutory redundancy pay.
If your employer doesn’t want you to work a notice period, they can offer you pay in lieu of notice (PILON), a lump sum taxed at the same rate as ordinary pay.
The other alternative is gardening leave, where you serve out your notice but don’t come into work.
In this case, you are still legally employed and will receive your salary and benefits.
Is redundancy pay taxed?
The first £30,000 of your redundancy pay is tax-free, but any amount above this will be subject to income tax at the standard rate.
You don’t have to pay National Insurance on any of your redundancy pay.
Outstanding holiday pay owed to you, or any other money such as bonuses will be taxed as pay.
If you receive other assets in your redundancy payment, such as a car, you will be taxed on the cash equivalent of these goods, but only to the extent that their value, together with the cash you receive, exceeds the £30,000 limit.
When do you receive your redundancy payment?
This should be paid to you on or before your last payday, but an alternative date can be agreed between you and your employer.
You should always make sure you have this agreement in writing.
Should you tell HMRC if you’re made redundant?
Yes. Although your first £30,000 is tax-free, you must let HMRC know about your redundancy pay on your tax return.
What if your employer doesn’t pay your redundancy?
If your employer doesn’t pay when or how they should, there are some key steps you can take:
Write to them: Firstly, write to your employer, stating clearly what you’re entitled to, including proof. Make sure you do this within six months of your employment being terminated.
Contact the Advisory, Conciliation and Arbitration Service (Acas): They will give you and your employer free, impartial advice on employment law and workplace issues and can try and resolve a dispute without you having to lodge an employment tribunal claim.
Go to a tribunal: You can lodge a claim at an employment tribunal at any point – there’s no time limit on this process.