What tax do I pay on redundancy payments?
In the current economic climate, losing your job is, sadly, a reality for many people.
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 National Insurance contributions on it? What if you get items other than money or if the payment is delayed?
We cover a few areas of what is a very sensitive and complex topic.
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 falls at your place of work.
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. You can read more about statutory redundancy pay on GOV.UK.
Your employer can pay you more than the statutory amount if they choose to do so or if you have terms in your employment contract that 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 reasons other than your redundancy. The nature of these payments (what they are for) affects how they are taxed. For example, you may get a redundancy package that includes holiday pay or pay in lieu of notice as well as a redundancy payment. Such payments of holiday pay or pay in lieu of notice are taxable as usual.
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 your employer is insolvent, you can claim your payment from the Redundancy Payments Office. The insolvency practitioner dealing with the affairs of your employer should provide you with a factsheet (RP1) and further information. There is more information on the GOV.UK website.
When is a redundancy payment taxable and chargeable to National Insurance contributions (NIC), and are there any tax reliefs available?
There are some special tax rules that apply to redundancy payments:
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. 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.
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 in the package may be both taxable and subject to NIC.
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 – 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 and be able to leave straight away. From 6 April 2018 such payments are always fully taxable and liable to NIC.
For payments made before 6 April 2018, if your contract of employment provided for such a payment or your employer normally paid them, HMRC will argue that they are taxable in full and that NIC is payable. This can be a complex area and the position depends on the particular facts, so you may need to take advice from a tax adviser.
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 – 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 are have reached a minimum age. The rules for pension funds generally changed from 6 April 2015 and you can read more about this on the website of the Pensions Advisory Service.
Your employer may agree with HMRC 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 should deal with the tax and NIC due on any taxable parts of your redundancy package, 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 your 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 you will be taxed using your normal tax code.
Payment after your employment ends
If your taxable 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 against any taxable amounts. This means you will be treated as having no personal allowance. 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.
This 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. You can see how tax is taken off redundancy payments in the example of Tom.
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.
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 it 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. HMRC can give you more advice on this.
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 or UC and will be unemployed for over four weeks, you will need to fill in form P50 – claim for repayment of tax when you have stopped working and send it to HMRC with parts 2 and 3 of your form P45 (or your P45 and details of any post P45 payment) or complete the online version of the form, using Government Gateway. You can find more information on reclaiming tax from HMRC in the tax refunds section.
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 the pages on employment benefits and expenses.
Tom lives in England and was made redundant from his job on 1 June 2019. He received 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 was taxed using his normal tax code on £25,000 of the redundancy payment. The redundancy payment, less tax, was paid to Tom with his final wages, which were taxed using his normal tax code. He then received his form P45.
Because of the way that relief for the personal allowance is given through the payroll, if Tom does not work for the rest of the year, or only has a small income, such as JSA, he may find that he can claim a tax refund for the year of redundancy because of unused personal allowance.
If, instead, the redundancy payment of £55,000 was not actually paid to Tom until 1 August 2019, after his form P45 had been issued, his employer would have to apply the 0T code. As above only £25,000 of the payment is taxable. Under code 0T, tax will be due as follows:
- on £3,125 at 20% is £625
- on £9,375 at 40% is £3,750
- on £12,500 at 45% is £5,625
so Tom will get £45,000 (£55,000 - £625 - £3,750 - £5,625).
Note that if Tom was a Scottish taxpayer, then the rates applying to his redundancy payment would be different.
As Tom has paid estimated tax on the taxable part of the redundancy payment, he may have overpaid tax in 2019/20 and may be able to reclaim some tax from HMRC. Contact HMRC if you think this applies to you.
Kevin received £40,000 from his company's redundancy scheme when he left in March 2019. They agreed to pay him this amount by way of £20,000 on 6 April 2019 and a further £20,000 on 1 January 2020. Both dates are in the 2019/20 tax year.
The £20,000 Kevin receives in April 2019 is exempt from tax. However only £30,000 in total is tax free, so only £10,000 of the £20,000 paid on 1 January 2020 is exempt, leaving the remaining £10,000 taxable as earnings for 2019/20.
Sally received a redundancy package of £38,000, with £19,000 payable on 1 September 2018 (during the 2018/19 tax year) and £19,000 being payable on 1 May 2019 (during the 2019/20 tax year).
The September instalment of £19,000 is free of tax together with a further £11,000 of the May 2019 payment – so in total £30,000 is exempt.
This means that the remaining £8,000 of the May 2019 payment (£19,000 - £11,000) will be charged to tax as earnings in 2019/20.
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 2018 his redundancy package is £20,000.
In December 2018 he starts working for Light Trucking Ltd but the company relocates to Japan and he is again made redundant on 31 March 2020. Light Trucking Ltd also gives 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.
Martin is made redundant on 1 December 2017 with a termination package of £25,000. On 1 May 2018 he is re-employed by the same company, but is made redundant from that job on 1 March 2020, 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 2019/20.
Jack is made redundant on 31 March 2018 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 2019 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.
For more information on redundancy or leaving your job have a look at the GOV.UK website.
You can calculate how much statutory redundancy pay you can get using the calculator on the GOV.UK website