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Are you likely to be made redundant? Do you want to know how your redundancy package will be taxed and whether you will need to pay any NIC on it? What if you get goods instead of money or if the payment is delayed?
We have tried to cover a few areas of what is a very complex topic in this area of the website. The issues looked at include:
What is redundancy?
When is a redundancy payment taxable?
Are there any tax reliefs available?
How does my employer deal with any PAYE & NIC due on the payment?
What if I do not receive the redundancy payment immediately?
What if I get goods instead of cash as my redundancy payment?
If I am unemployed after my redundancy - how do I claim a tax repayment?
What about any retraining costs or counselling my employer pays for?
For more detailed information on redundancy or leaving your job have a look at the Directgov website.
What is redundancy?
- You will be redundant if you lose your job because fewer people are needed where you work, for example if your job can be done by less people or the volume of work falls at your place of work.
- Your employer may make a payment to you when you become redundant. Called a redundancy payment, this is to compensate you for being made redundant.
- You may also qualify for statutory redundancy to be paid by your employer but the employer can pay you more than this amount.
- Not all amounts you are paid when you leave the job will be redundancy payments and it will depend on what payments you get as to how they will be taxed.
- You may get a redundancy package that may include holiday pay or pay in lieu of notice as well as a redundancy payment.
- You may also be able to claim additional compensation from your employer if you were unfairly selected for redundancy, for example because of your sex, race, religion or a disability. You should seek legal advice if you think this may apply to you. Any additional compensation would be treated as part of the redundancy payment referred to above for tax and NIC purposes.
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When is a redundancy payment taxable?
- Unpaid wages and profit target payments or overtime are taxable in full and National Insurance Contributions (NIC) will be payable, even if they are paid after employment has ended.
- Payments in lieu of notice - if these are provided for in your contract of employment or your employer normally pays them - they will be taxable in full and NIC will be payable as well.
- Otherwise they are treated in the same way as redundancy payments (see below)
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If a termination package includes pay in lieu of notice, this will then delay the date when you can qualify for Jobseeker's Allowance, until after the notice period in question has ended.
For example - On 1 June, Sarah is dismissed without the four weeks notice to which she is entitled. On 1 June, she is given final wages of £1,000, holiday pay of three days and a termination payment of £2,000 which includes pay in lieu of notice. Notice would have run out on 28 June. Her final wages are ignored, The termination payment is taken into account from 1 June until 28 June. Holiday pay is taken into account from 29 June for three days. Her three waiting days start from 2 July and Sarah is therefore entitled to Jobseekers Allowance from 5 July.
- Holiday pay is taxable in full but NIC is not always payable
- Any payment made to you on the basis you restrict your activities in some way - called a restrictive covenant - is taxable in full and NIC is payable.
- Occupational pensions are taxable in full but no NIC is payable (though you may be able to commute, ie exchange, part of a pension entitlement for a tax free lump sum).
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Are there any tax reliefs available?
- Although a redundancy payment is taxable in the same way as your wages, there are some special tax reliefs:
- NIC is not payable on redundancy payments but if it is part of a package some of the other amounts in the package may be taxable.
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How does my employer deal with any PAYE & NIC due on the payment?
- Your employer may agree with the Revenue how you will be taxed on your redundancy payment before they pay it to you. This does not always happen.
- As with your wages, your employer (or if they are insolvent, the Department for Innovation, Universities & Skills, formerly the Department for Education and Skills) will deal with any tax or NIC due on the redundancy.
- If your redundancy payment is made before you leave your job, any taxable amounts such as unpaid wages and any part of a redundancy payment over £30,000 will be included in your final pay and you will be taxed using your normal code number.
- If your taxable redundancy payment is made after you leave your job, your employer will take off 20% tax (basic rate tax) of any taxable amounts before paying you the balance. This will only affect you to the extent that your redundancy payment is over £30,000.
- So if you are a higher rate taxpayer, you will have extra tax to pay on any redundancy over £30,000. You can contact the Revenue for help on paying this tax.
- You can see how tax is taken off redundancy payments in the example on Tom
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What if I do not receive the redundancy payment immediately?
- You will be taxed on the redundancy payment in the year that you get it even if you were made redundant earlier.
- The £30,000 limit applies to one particular job and so can be carried forward from year to year until used up to soak up any later redundancy payments from the same job. There are three examples which explain this in more detail:
- Kevin - payment by instalments in the same tax year
- Sally - payment by instalments in two tax years
- Eve - payment of redundancy made over three tax years
- Any NIC that is payable on any part of a redundancy package paid later will be charged at whatever the rates are when you receive the payment.
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What if I get goods instead of cash as my redundancy payment?
- Your redundancy package can include items such as use of a car, fuel, accommodation or a loan at a reduced rate of interest.
- You will be taxed for any year on the 'cash equivalent' of the goods concerned to the extent that the cash equivalent, together with any actual cash you receive, exceeds £30,000. An exception to this rule is loans that are waived. If you have a loan from your employer and it is waived as part of a redundancy package, it is taxable in full even if the total value of your package is less than £30,000. The Revenue can give you more advice on this.
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If I am unemployed after my redundancy - how do I claim a tax repayment?
- If you are claiming Jobseekers Allowance (JSA) - you must give your P45 (the form your employer gives you when you leave your job) to the Jobcentre as soon as you claim the allowance.
- They will use this to work out whether you will be entitled to a repayment when you stop claiming or once the tax year ends on 5 April whichever comes first.
- If you are not claiming JSA you will need to fill in Form P50 and send it to your tax office with parts 2 & 3 of your P45.
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What about any retraining costs or counselling my employer pays for?
- Any costs your employer pays to help you adjust to redundancy or to help you retrain or find a new job including any related travel expenses are usually exempt from tax. You or your employer can find out more about this from your tax office
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Tom - redundancy paid before & after leaving job
Tom was made redundant from his job on 1 June 2010. He receives a redundancy payment of £55,000 with his final pay packet on that day. The first £30,000 of the redundancy payment is tax-free so Tom will be taxed using his normal code number on £25,000 and the balance will be paid to Tom with his final wages.
If instead the redundancy payment of £55,000 was not actually paid to Tom until 1 August 2010, his employer would have to take 20% tax off before paying Tom the balance. As above only £25,000 of the payment is taxable. Tax on £25,000 at 22% is £5,000 so Tom will get £50,000 (55,000-5,000).
If the taxable part of Tom's redundancy payment of £25,000 when included with his other income means that his highest rate of tax for the year will be 40%, Tom will have to pay some extra tax for 2010/11. Your tax office can help you work this out if it applies to you.
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Kevin - payment in excess of exempt £30,000 limit - instalments in same years
Kevin received £40,000 from his company's redundancy scheme when he left in March 2010. They agreed to pay him this amount by way of £20,000 on 6 April 2010 and a further £20,000 on 1 January 2011.
The £20,000 Kevin received in April 2010 is exempt from tax. However only £30,000 in total is tax-free, with the result that only £10,000 of the £20,000 paid on 1 January 2011 will be exempt leaving the remaining £10,000 taxable as earnings for 2010/11.
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Sally - payment in excess of £30,000 made over two tax years
Sally received a redundancy package of £38,000, with £19,000 payable on 1 September 2010 and £19,000 being payable 1 May 2011. The September instalment of £19,000 was free of tax together with a further £11,000 of the May 2011 payment - so in total £30,000 is exempt.
This means that the remaining £8,000 of the May 2011 payment (£19,000-11,000) will be charged to tax as earnings in 2011/12.
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Eve - payment in excess of £30,000 made over three tax years
Eve received a termination package of £48,000, of which £12,000 was paid on 1 March 2010, and similar amounts on 1 September 2010, 1 March 2011 and 1 March 2012. Eve can receive up to £30,000 exempt from tax and the remainder will be taxable as earnings.
On that basis, the payment on 1 March 2010 was tax-free. The payment of £12,000 on 1 September 2010 is also exempt leaving £6,000 of the March 2011 payment to be treated as tax free (£30,000 - £12,000 - £12,000), with the remaining £6,000 taxable as earnings for 2010/11. The entire £12,000 payable on 1 March 2012 will also be chargeable to tax for 2011/12.
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Chris - redundancy payments where the employers are connected
Chris is employed by Heavy Rail Ltd. Heavy Rail Ltd owns all the shares in Light Trucking Ltd. When Chris is made redundant by Heavy Rail Ltd on 1 June 2010 his redundancy package is £20,000. In December 2010 he starts working for Light Rail Ltd but the company relocates to Japan and he is again made redundant on 31 March 2011. The company give him a £20,000 termination package.
As one company owns the other we say the two companies are connected or associated with each other so Chris can have only one £30,000 exemption. This means the £20,000 received from Heavy Rail Ltd is tax-free, but only £10,000 of the payment from Light Trucking Ltd is exempt.
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Martin - redundancy when working again for the same employer
Martin is made redundant on 1 December 2010 with a termination package of £25,000. On 1 May 2011 he is re-employed by the same company, but is made redundant from that job on 1 March 2012, being paid a further £10,000 in redundancy.
In both cases the employer is unchanged. Therefore it is as if Martin is employed by the same person on each occasion. This means he has only one exemption of £30,000 to use. As a result the whole of the first payment of £25,000 is exempt, but only £5,000 of the second payment. Martin will be taxed on the remaining £5,000 during 2010/11.
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Jack - redundancy from different employers in two successive jobs
Jack is made redundant on 31 March 2010 and receives a redundancy package of £30,000 which is exempt. His new job is with a completely new employer unconnected with his old one. Sadly the new company have to make him redundant on 31 December 2010 as part of a series of cost cutting measures but they pay him £15,000 redundancy.
This payment is also tax free so effectively Jack will have had the benefit of two £30,000 exemptions. In fact he could have received a further £15,000 from the second company and this would also be tax free as part of the second £30,000 exemption.
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