Tax on Redundancy Pay: Is Redundancy Pay Taxable?
If you’re being made redundant, then there are a number of issues that you will want to explore, including whether your redundancy is fair, whether your employer has carried out a fair redundancy consultation process, and whether your employer has offered you suitable alternative employment. In addition to that, you will want to know, “Is my redundancy pay taxable”?
Our expert employment solicitors have set out a guide for employees below
What is Redundancy Pay?
Redundancy pay is compensation provided to employees who lose their job due to their role no longer being necessary – this can be in voluntary redundancy or compulsory redundancy situations. It is typically offered as a financial cushion to help individuals transition between jobs, as a gesture of goodwill, and/or to settle potential Employment Tribunal claims.
Redundancy pay can be either statutory (mandated by law) or contractual (as agreed in an employment contract).
As per current laws, you have to have been working for two years or more in order to be eligible for statutory redundancy pay. Employees are entitled to:
- Half a week’s pay for each full year of service they were under 22 years of age
- One week’s pay for each full year of service they were 22 years of age or over, but under 41
- One and a half weeks’ pay for each full year of service they were 41 years of age or older
It is important to keep in mind that the length of service in this case is usually capped at 20 years. Weekly earnings are capped at £719, meaning that is the maximum amount that will be used for calculating your pay – even if you earn more. Additionally, the maximum amount of redundancy pay is capped at £21,570.
Notice Period on Redundancy Pay
If you are made redundant, you are entitled to a notice period before your employment ends. However, if your employer wants you to leave earlier than your notice period, or even right after you are made redundant, you could be entitled to pay in lieu of notice (PILON)
More on notice period during redundancy and redundancy pay here.
Do Employees Have to Pay Tax on Redundancy Pay?
Yes, employees do have to pay tax on redundancy pay, but this comes with certain conditions. If your redundancy package is under £30,000, you do not need to pay tax on redundancy pay. However, it is important to keep in mind that the redundancy package could include holiday pay, PILON, bonuses, non-cash benefits and even overtime.
What is the Limit for Tax on Redundancy Pay
In the UK, redundancy payments up to £30,000 are tax-free if they are paid as compensation for termination of employment – payments above this threshold are subject to income tax but not employee national insurance contributions. This includes statutory redundancy pay and ex-gratia payments (although contractual redundancy payments will normally be subject to tax and national insurance).
Tax implications for payments exceeding £30,000
Any amount of redundancy payment exceeding £30,000 is taxed at your normal income tax rate, but will normally not be subject to employee national insurance contributions (if the redundancy payment is being paid as compensation for termination of employment).
Components of a redundancy package
These are the standard components of a redundancy package.
Statutory redundancy pay
Statutory redundancy pay is a legal entitlement based on age, length of service, and weekly earnings, subject to a weekly earnings cap set by the government. This payment is always tax-free up to £30,000.
Payments in lieu of notice (PILON)
PILON is compensation for the notice period when an employer chooses to terminate employment immediately. PILON is taxable as it is considered earnings rather than compensation for termination of employment.
Holiday pay and other accrued benefits
Any accrued but unused holiday pay is taxable, as it is treated as regular earnings. Similarly, other accrued benefits, such as bonuses, are also taxable.
Compensation for termination of employment
This is also referred to as “enhanced redundancy pay” (as your employer is paying you a greater amount of redundancy pay than you are entitled to by law). These are discretionary payments made by employers and are tax-free up to £30,000. Your employer will often ask you to sign a settlement agreement as the ‘quid pro quo’ for paying you tax-free compensation for the termination of your employment.
Tax on Redundancy Pay: When is it Taxable?
Although the statutory maximum for redundancy pay is £21,570, some employers offer enhanced redundancy pay. This could be either to reward the employee, help redundant employees out, or even to incentivise employees into voluntarily opting for redundancy.
In such cases, if the pay goes over £30,000, then tax on redundancy pay will automatically be applicable. For example, if an employee is offered £45,000 redundancy pay, £30,000 out of that will be tax-free, while the remaining £15,000 will be taxable.
The other situations where redundancy pay could increase and become taxable are when the following are included:
- Holiday Pay: If the employee has not taken their entitled holidays, the payment for the remaining holidays could be included in the redundancy package. This amount is taxable and is not included in the tax-free entitlement
- Overtime and Bonus: Unpaid wages, bonus or overtime pay are all subject to tax and national insurance.
- PILON: If an employee is offered PILON to end their employment early, this payment is also subject to tax and national insurance deductions.
- Non-Cash/Other Benefits: If the employee had non-cash benefits such as a company car or other similar perks, this could be subject to tax.
Managing tax on your redundancy payment
We have included below some tips on managing tax on your redundancy payment.
Checking your tax position with HMRC
It is advisable to review your tax calculation and confirm its accuracy with HMRC. You can use the HMRC online services to check your tax record and payment history.
Seeking professional tax advice
A tax advisor can help you understand your tax liabilities, identify eligible exemptions, and ensure compliance with HMRC regulations. We are not accountants, but expert employment lawyers, and expert accountants will help you to determine whether your redundancy pay is taxable (and at what rate).
Who deals with the tax on the redundancy pay?
The employer will usually deduct tax and NI contributions from your final payslip, but employees still have a responsibility to ensure these are correct and to check what elements of the redundancy pay are taxable (and what are not). Because redundancy pay tax calculations can sometimes be complex, employers may not always get them right, and you should always double-check.
There is a general assumption that the first £30,000 of a redundancy payment will always be tax-free, but it isn’t always this straightforward – the calculation of tax on final redundancy payments can often be quite complex. You should always carefully evaluate your position and get advice from the appropriate experts.
My Employer Has Not Paid Redundancy Pay – What Can I Do?
If you are being made redundant, you are entitled to redundancy pay. However, not getting paid could make the process of losing your job even more difficult.
Firstly, get in touch with your employer. Since you are legally entitled to redundancy pay, make sure to write to them and send them evidence of your redundancy as a reminder (this could be a letter, payslips, agreements, etc). Additionally, you can also get in touch with ACAS for free, impartial advice on your employment rights.
However, if all else fails, you have the right to take this matter to the employment tribunal and make a claim. Keep in mind, there are time limits for this. You have a file a claim:
- Six months (minus one day) from the date your job ends – For a statutory redundancy pay claim
- Three months (minus one day) from the day your – for a contractual redundancy pay claim
Got Questions on Your Redundancy Pay? Get in Touch Today!
If you are owed a redundancy payment, then you may be worried that your employer has not clearly set out to you which payments are tax-free and which redundancy payments are taxable. We can also advise you on whether your redundancy has been fair and what options you have regarding an Employment Tribunal claim.
As employment law specialists, Redmans Solicitors can answer your questions and provide expert advice. To get started, please:
- Call us on 020 3397 3603
- Request a callback via our online form
Contact our employment solicitors
Our employment lawyers are experts in dealing with Employment Tribunal claims and advising on employment disputes, including redundancies.
Tessa Harris supervises our employment law team and has extensive experience in advising employees on employment claims, Employment Tribunal proceedings, and settlement agreements.
Speak to Tessa today to discuss your situation.
