As employers are looking to see how their business can operate in a post-lockdown world, unfortunately many are needing to reduce their workforce. On this page, we explain the key things to consider from a tax and benefits perspective when being made redundant.
What happens if I am made redundant?
Your employer may make you (or rather, your job) redundant if they no longer need your services.
For example, if your employer needs to reduce or change their operations as a result of the coronavirus pandemic, they may not need you to carry out your role anymore.
Employers have to follow rules when they select staff for redundancy. For more information on your rights when you are made redundant, see GOV.UK.
Your employer may pay you certain sums of money if you are made redundant. This can include things that you have a contractual right to receive, like a payment in lieu of notice (if you are not asked to work your notice period), or a payment for accrued holiday (holiday you have built up but not taken).
If you are an employee with at least two years’ service, your employer must also pay you statutory redundancy pay. This is a legal right. We explain this in more detail below.
Your employer may also make additional ‘ex-gratia’ payments, beyond their contractual or legal obligations.
For further information on the types of payments you might get on redundancy, see our guidance.
What is statutory redundancy pay?
Statutory redundancy pay is an amount which your employer must pay you in certain circumstances if you are made redundant. The amount you get is calculated according to how much you were paid, how long you have worked for your employer as well as how old you were during your service for your employer.
For more information on how statutory redundancy pay is calculated, see GOV.UK.
There are two key conditions to be entitled to statutory redundancy pay:
- You must be an employee AND
- You must have at least two years’ service with your employer.
Therefore, you will not be entitled to statutory redundancy pay if you are an employee but you have less than two years’ service with your employer.
Similarly, if you are a ‘worker’ for employment law purposes (this will include most people on a ‘zero hours’ contract) then you will not be eligible for statutory redundancy pay, even if you have more than two years’ service.
Statutory redundancy pay is a cost to the employer – it cannot be claimed back from the government unlike some other statutory payments. If you are furloughed in the run up to being made redundant, it is also not something for which your employer can claim a coronavirus job retention scheme grant.
How are sums payable on redundancy taxed?
Things like accrued holiday pay and payments in lieu of notice will generally be sums which you have a contractual right to receive and, provided they are paid before you receive your form P45, they are therefore taxable and subject to National Insurance contributions (NIC) in the normal way. These payments should be included in your form P45 – which your employer should give to you upon leaving.
Statutory redundancy pay is not taxable and does not have to be included in your form P45 (although your employer may give you a letter setting it out).
There is a special tax regime which can apply to other payments or benefits which are made in connection with the termination of a person’s employment (for example, an 'ex gratia' payment to compensate you for losing your job) provided that those payments are not otherwise taxable under general principles.
The first £30,000 (reduced by the amount of any statutory redundancy pay which is received) of payments which are taxed under this regime will be exempt from tax. Sums falling into this regime will also be free of NIC – even for amounts more than £30,000.
We discuss the tax treatment of these and other items further in our guidance for employees.
What if my employer pays me after I have been issued with a form P45?
If your employer makes you a taxable payment after issuing you with a form P45, then they are obliged to operate a certain tax code (0T on a non-cumulative basis) which means – among other things – that you will not have any personal allowance set against the payment. Broadly, you are likely to have an amount of tax withheld from you which will exceed the amount ultimately payable when your annual position is reconciled.
Depending on your circumstances, this might mean that you are due a refund of tax. See below for how to claim this back.
We explain how NIC works in these circumstances, including what paperwork your employer should give you summarising the payments made and amounts deducted, in our main guidance.
What if my employer goes into liquidation?
In this event, if you are entitled to statutory redundancy pay then you should be able to receive it, and any other outstanding payments, from the National Insurance Fund instead of your employer. See GOV.UK for more information.
You should note that tax and NIC will be withheld on any payments that they make you that are ordinarily taxable or chargeable to NIC.
What if I don’t get a form P45?
If your employer goes into liquidation, things may get quite chaotic and you might not be given much notice/a form P45 etc.
If your employer does not provide you with a form P45 summarising your pay and taxes to the point of termination, in the first instance you should ask the insolvency practitioner to provide you with one. You may need it for various purposes, such as to claim tax back or to give to the Jobcentre if you want to claim unemployment benefits.
If you don't know who the insolvency practitioner is, contact the Insolvency Service which should hold their details and give you further support.
If this is not successful, then to the extent you need a record of your pay and tax details for that employment, you should use the year-to-date pay and tax details from your last payslip, along with the details from any paperwork sent to you by the National Insurance Fund.
If your employer provides you with electronic payslips or other payroll forms, you should try and ensure you download these and keep separate copies in case you no longer have access to them via your employer’s online payroll system.
If you start a new job, you should ask to complete a Starter Checklist if you cannot provide them with a form P45.
You should be aware that if an employer goes into liquidation, they may not have paid over to HMRC some of the amounts deducted from you via the payroll, due to them being in financial difficulty. In this situation you should not have to pay it again, but if you are on a low income and HMRC contact you, you should seek some advice from TaxAid.
What if I don’t have access to my payslips?
In this event, provided that your employer submitted the relevant information to HMRC via Real Time Information (RTI), then you may be able to access the details via your Personal Tax Account.
Once you are logged in, you should click on ‘Pay As You Earn (PAYE)’, ‘Check current tax year’, ‘View or update employment details’ and then ‘Check payments received’ under ‘Income received to date’. You should then be able to view year to date figures for taxable income, income tax paid and National Insurance paid.
What effect does redundancy have on my working tax credit claim?
If you are an existing tax credits claimant, you must inform HMRC if you are made redundant and stop working enough hours to qualify for working tax credit. You may qualify for a four-week run-on of working tax credit. If you find another job within 7 days, you should remain entitled to working tax credit – assuming the new job meets the hours requirement – but you should notify the details of the new employer to HMRC.
Your redundancy income for tax credits purposes will be the same as your redundancy payments that are liable to tax.
What effect does redundancy have on my universal credit claim?
Your redundancy income for universal credit purposes will be the same as the amount that is liable to tax, in the assessment period in which it is paid.
Note that if amounts received take your capital to between £6,000 and £16,000, then your claim to universal credit will be affected as you will be deemed to receive income from this capital. Indeed, if you have capital over £16,000 you will not be entitled to universal credit.
Can I claim a refund for amounts withheld from my earnings if I am made redundant?
This depends on the nature of the amount withheld.
You may be eligible for a refund of amounts withheld from you so far in the tax year if you are made redundant, based on unused personal allowances (and potentially unused basic and higher rate bands). However, because your ultimate liability to tax is calculated annually, whether a refund is due will depend on what taxable income you receive between the point of being made redundant and the end of the tax year.
If you get another job and do not complete a Self Assessment tax return, HMRC should automatically reconcile your position after the end of the tax year (that is, after 5 April).
However, it is possible to get an in-year repayment of income tax if you are not claiming taxable benefits (like jobseeker’s allowance) or receiving a pension from your employer and have not started a new job. In these circumstances you should complete form P50.
If you are claiming benefits, then the Jobcentre should arrange a refund if you have overpaid tax, either when you stop claiming or once the tax year ends on 5 April, whichever comes first, provided you give them your form P45.
National Insurance contributions
It is not normally possible to claim a refund of NIC, unless they have been deducted in error. National Insurance is calculated and paid according your pay period, and is not generally reconciled on an annual basis like for tax.
You cannot usually claim a refund of the pension contributions which you have already made unless you opt out of a pension scheme (or leave the job) within 30 days of starting.
However, you might be able to get a ‘short service’ refund of your contributions from some ‘defined benefit’ pension schemes if you leave within two years of joining. See the Pensions Advisory Service and GOV.UK for more information.
Student loan repayments
If you have had student loan repayments deducted from your pay, then your annual income turns out to be below the repayment threshold you can claim a refund. See our guidance for more information.
What benefits can I claim if I lose my job?
We cover this question separately in our other coronavirus guidance.
Where can I find more information?
We publish more detailed guidance at What tax do I pay on redundancy payments?.
See also Redundancy: your rights on GOV.UK.
For more specific and detailed information on how redundancy is affected by the ongoing coronavirus pandemic and the coronavirus job retention scheme, see also the Coronavirus (COVID-19): redundancy guide published by the Chartered Institute of Personnel and Development.