Are you likely to lose your job? Do you want to know how your redundancy package will be taxed and whether you will need to pay any National Insurance contributions (NIC) on it? What if you get items other than money or if the payment is delayed? This page covers some of the tax implications of redundancy and termination payments.
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You are made redundant if you lose your job because your employer needs fewer employees where you work, for example, if your job is no longer needed because of advances in technology or the volume of work reduces at your place of work.
Employers have to follow rules when they select staff for redundancy.
When you become redundant (actually it is your job that becomes redundant) your employer may make a payment to you, called a redundancy payment. This is to compensate you for being made redundant.
You may qualify for statutory redundancy pay to be paid by your employer if you have worked for your employer for two years or more. Employers pay statutory redundancy pay at levels which are fixed by the government and based upon government rules. It is the legal minimum, so your employer cannot pay you less than this, if you qualify.
Your employer can pay you more than the statutory amount if they choose, or if you have terms in your employment contract which offer more favourable redundancy treatment than the statutory scheme. This could mean a bigger lump sum or getting a pay-out even if you have been there for less than two years.
Your redundancy package can include payments that are made for other reasons than your redundancy. The nature of these payments (what they are for) affects how they are taxed (see below).
Genuine redundancy payments must also be distinguished from other payments which would be taxable as earnings. For example, a payment that is really a bonus, say for meeting production targets or doing extra work in the period leading up to redundancy, is not compensation for redundancy.
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.
If you have been made redundant and your employer is now insolvent (that is, your employer has gone out of business and has no money to pay you), you can claim your payment from the Insolvency Service. The insolvency practitioner dealing with the affairs of your employer should provide you with factsheet (RP1) and further information. There is more information on GOV.UK about how to apply for money you are owed.
Tax and NIC will be taken off any payments that they make to you that are ordinarily taxable or chargeable to NIC.
Further links to detailed information about how payments from the Insolvency Service work, can be found on GOV.UK.
In particular, their specific payments guidance explains:
- how they calculate each kind of payment,
- what deductions they have to make, and
- what to do if you think your payment is wrong
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.
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 and 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. Some employers may still offer to pay you some kind of redundancy payment, however.
Statutory redundancy pay is a cost to the employer – it cannot be claimed back from the government unlike some other statutory payments.
Tax, NIC and reliefs
There are some special tax rules that apply to redundancy payments (payments or benefits made in connection with the termination of employment, for example, an ‘ex gratia’ payment to compensate you for losing your job) provided that the payments are not otherwise taxable under general principles.
There is an exemption from income tax on payments up to £30,000 from one job. If you have more than one job the exemption applies to each job – see the example of Jack. This rule applies unless:
- The employers are connected or associated in some way, for example one company owns all the shares in the other or someone has two businesses – see the example of Chris.
- You go back to work for the same employer – see the example of Martin.
What this means is that if you only get a statutory redundancy payment, then due to the relatively small amounts involved, this will always fall within the £30,000 exemption and be tax-free.
Because such a redundancy payment is not taxable (nor NICable – see below), it should not be included on your P45. As such, your employer can pay it to you outside of normal payroll processes, although you should be given a letter explaining what the payment is in case you need a record of the income for other reasons – for example, for benefits purposes. Keep a copy of the letter for your own records.
Whatever is left over of the £30,000 exemption is available to set against any ‘extra’ amount of redundancy payment that you might receive from your employer. Remember that the payment has to be discretionary/compensatory to qualify.
You do not have to pay any NIC at all on redundancy payments (even if over £30,000), but if the redundancy payment is part of a package, some of the other amounts (see below) in the package may be both taxable and subject to NIC.
Other types of payment
- Unpaid wages and profit target payments or overtime
These are taxable in full and NIC is payable, even if you receive the amounts after your employment has ended.
- Payments in lieu of notice (PILON)
You might be expected to work your notice period before your redundancy takes effect, but often you will get a payment in lieu of notice (that is, instead of being given notice) and be able to leave straight away. From 6 April 2018 such payments are always fully taxable as earnings and liable to NIC – whether contractual or non-contractual (where a non-contractual PILON is included in a termination payment, there are some special rules to help determine the amount taxed as earnings).
- Holiday pay
This is treated in the same way as wages, so it is taxable in full and subject to NIC.
- Restrictive covenant
Any payment made to you on the basis that you restrict your activities in some way is taxable in full and NIC is payable.
- Employer contributions to a pension scheme
Normally these are totally free from tax and NIC.
- Occupational pensions
You may decide to start drawing your occupational pension if you are made redundant. These are taxable in full, but no NIC is payable. You may be able to commute, that is exchange, part of a pension entitlement for a tax-free lump sum. This normally only applies if you have reached a minimum age.
Taxable parts of redundancy
If there is any doubt about whether the £30,000 exemption applies to any element of your package, your employer may agree with HMRC how you will be taxed before they pay anything to you. This does not always happen.
As with your normal wages, your employer should deal with the tax and NIC due on any taxable parts of your redundancy package under the Pay As You Earn (PAYE) system, but the exact treatment, and any action you need to take, will depend on the timing of the payment.
When you are made redundant, your employer should issue you with form P45.
- Payment before employment ends
If your redundancy payment is made before you leave your job and before your employer issues you with form P45, any taxable amounts, such as unpaid wages and any part of a redundancy payment over £30,000, should be included in your final pay and subject to tax/NIC as normal. You will be taxed using your normal tax code.
- Payment after employment ends
If your redundancy payment is made after you leave your job and your employer has already issued form P45, your employer will use a 0T tax code on a Week 1/Month 1 basis (non-cumulative) against any taxable amounts. This means you will be treated as having no personal allowance and the 0T code will calculate the tax to be deducted at basic, higher and additional tax rates as if it were your first payment of PAYE income in the tax year (in other words it is not on the normal cumulative basis). The employer will take off tax at the appropriate rates before paying you the balance.
Remember, this will only affect you to the extent that your package contains taxable elements, such as unpaid wages, or if your redundancy payment is over £30,000.
Your employer should not issue another P45 but should give you a letter showing the date of payment, the gross amount and the amount of income tax deducted under PAYE.
The 0T code means you may overpay tax on the redundancy payment. You will be able to reclaim any overpaid tax and should contact HMRC to check your position. They may not be able to do this until the end of the tax year, when they will be able to reconcile your pay and tax position fully.
You can see how tax is taken off redundancy payments in the example of Tom.
With regards to NIC on taxable payments made after the P45 has been issued, your employer should deduct NIC as normal – unless it is an ‘irregular’ payment like accrued holiday pay in which case they should treat it as a weekly payment. This may be a problem if you are usually paid monthly, as a weekly earnings basis will only give you a weekly amount of NIC-free pay to use against the payment, rather than the monthly earnings basis that you may be used to. This may mean you receive less pay than you were expecting. However, HMRC will not make any refunds of NIC in these circumstances.
- Delayed redundancy payment
You may not receive your redundancy payment immediately. You will be taxed on the redundancy payment in the tax year that you get it, even if you were made redundant in an earlier tax year.
The £30,000 limit applies to one particular job and can be carried forward to be used against any later redundancy payments from the same job. There are two examples which explain this in more detail:
- Kevin: payment by instalments in the same tax year,
- Sally: payment by instalments in two 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.
- Items other than cash
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 (in other words you are no longer obliged to pay back) as part of a redundancy package, it is taxable in full even if the total value of your package is less than £30,000.
Claim a tax refund
If you are made redundant, you may be eligible for a tax refund on your pre-redundancy earnings.
You can find more information on claiming a refund on our page PAYE tax refunds.
No 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. 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 (see below), along with the details from any paperwork sent to you by the National Insurance Fund (if your employer was insolvent).
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.
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.
No access to 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.
Amounts withheld from earnings
The nature of the amount withheld determines whether you can claim a refund.
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 give your new employer a P45 from your old job, your new employer (if there is time before the end of the tax year) should refund any overpaid tax to you via the payroll.
If you start a new job and cannot provide them with a P45, you should ask to complete a starter checklist. HMRC should then automatically reconcile your position after the end of the tax year (that is, after 5 April).
If you are not starting a new job, 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.
For more information, see our page PAYE tax refunds.
- National Insurance contributions
It is not normally possible to claim a refund of NIC, unless they have been deducted in error. NIC is calculated and paid according to your pay period and is not generally reconciled on an annual basis like for tax.
- Pension contributions
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 MoneyHelper and GOV.UK for more information.
- Student loan repayments
There are different repayment thresholds depending on your student loan repayment plan. These are explained in our student loan guidance. It is possible to request a repayment from the Student Loans Company (SLC) if your earnings during the tax year are below your student loan repayment thresholds. This is explained in more detail in our guidance.
Retraining or counselling
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. Counselling services provided on redundancy might also be exempt. There is more information on our page Non-taxable payments and benefits from employment.
Working tax credits
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.
Our tax credits guidance gives more information on reporting changes for tax credits purposes to HMRC.
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.
You should inform the Jobcentre/DWP as soon as possible of your change in circumstances.
If you have been employed and you become unemployed, you may be able to claim new-style JSA (the new name for contributory jobseeker’s allowance). If you, or both you and your partner if you have one, have reached state pension credit age then you cannot claim JSA but may be able to claim pension credit. There are national insurance contribution (NIC) requirements associated with new-style JSA which are alluded to in the JSA guidance on the GOV.UK website but in summary the two conditions are that:
- You must have paid, or be treated as having paid, at least 26 weeks contributions on earnings at or above the lower earnings limit (LEL) in one of the last two complete tax years immediately before the relevant benefit year (which is usually the calendar year when you meet the entitlement conditions and submit your claim). This condition can be relaxed in certain situations.
- You must have paid contributions or received NIC credits on earnings of at least 50 times the LEL in each of the two complete tax years immediately before the relevant benefit year.
For more information on your rights, including statutory redundancy pay, when you are made redundant, see GOV.UK.
You can calculate how much statutory redundancy pay you can get using the calculator on GOV.UK.
The tax treatment of non-statutory redundancy pay is set out by HMRC in SP 1/94.
HMRC’s technical information on redundancy payments, can be found in their EIM manual, starting at EIM13750.
In the situation where your employer taxes a redundancy payment incorrectly, you should contact HMRC or seek some advice from TaxAid.
Redundancy can be a complex area and the position depends on the particular facts, so you may need to take advice from a tax adviser. We tell you how you can find a tax adviser, including through the tax charities, on our page Help with tax from friends, family, professionals or other organisations.