When a company makes you redundant, any tax you might have to pay on that redundancy payoff is easily overlooked with finding a new job usually taking priority.
The rules around redundancy and tax can be more complex than at first they might appear meaning it’s best to find out as much as you can before you receive your redundancy payment.
Unfortunately redundancies can happen and it’s not just because of events caused by the likes of COVID 19 so being financially prepared is recommended.
Working out the tax free part of your redundancy pay in advance helps you avoid an unexpected tax bill and plan your budget with confidence moving forward.
£30,000 tax free redundancy payment
Workers who are being made redundant can receive a tax and national insurance free payment of up to £30,000 as a so called “qualifying termination payment”.
This threshold will include any statutory redundancy pay. Anything you receive over that £30,000 limit will be taxable unless you are leaving due to ill health (in which case there may be a means test to check for eligibility).
Redundancy payments that are taxable
Some redundancy payments will be taxable including any payment arrears, some bonuses and untaken holiday pay.
Understanding which parts of your redundancy are taxable gives you a clearer picture on what you will be left with after tax and national insurance deductions.
- Holiday pay is classed as taxable income and is treated in the same way as normal pay from your employer.
- Unpaid wages are taxed as normal even if you receive the pay after you have left your employment.
- Bonuses and commission are taxable if they are considered part of an employees normal weekly/monthly wage. If they are not they can be incorporated in your redundancy pay and won’t qualify for tax purposes unless the £30,000 threshold is met.
Cash benefits and redundancy
A cash benefit includes items like a company car or computer and will be added to your total redundancy pay for tax purposes. This may take your total redundancy pay to £30,000 or more.
Redundancy tax on payments in lieu of notice
A payment in lieu of notice or PILON is normally given by an employer who would like to end your employment contract early.
If you receive a PILON payment this should usually be taxed as per a normal salary payment. The PILON payment may not be taxable if your employer does not give you a proper notice period and pays you damages because of this.
Payments received while on gardening leave which is different are also classed as taxable income.
Redundancy payment of £30,000 or more
In cases where you have received a redundancy payment of £30,000 or more your employer should tell HMRC.
HMRC should then inform you that additional tax might be due because of your redundancy payment and will advise you that you may be asked to complete a self assessment tax return to collect any tax that is due.
Sometimes things will go wrong and you won’t be made aware at the time of your redundancy payment of the possibility of a tax bill later on.
HMRC might later realise the problem and send you out a self assessment tax return to complete to collect the underpayment of tax.
Redundancy and your tax code
As an employee under PAYE you will receive a tax code at the start of each financial year and it will appear on your pay slip.
The code calculates the tax based on the prediction that you will earn about the same every month and takes into account your tax free personal allowance and the applicable income tax rates for your earnings.
Redundancy and promotion are two scenarios that can adversely affect the amount of tax you will and should pay. When your income drops or ceases, the tax you paid earlier in the year could potentially end up being too much or too little.
Employers normally use a code OT Month 1 for lump sum redundancy payments that are taxed in an effort to minimise any future underpayment of tax.
If you start a new employment in the same tax year as being made redundant it is important to give your new employer your P45 from your last job and then check your tax code is correct when you receive your first pay.
If you are unsure of your tax codes accuracy it is best to call HMRC to allow for your code to be changed if necessary.
How to claim your Redundancy Tax Rebate
You will not automatically be due a tax rebate just because you are made redundant. A common reason for being owed a rebate is where you are made redundant fairly early on and are unable to find more work during the same tax year.
There are two main options in these circumstances to claim your tax rebate:
- If you claim benefits a tax rebate will normally be administered by the Jobcentre and you should receive the refund automatically.
- If you do not claim benefits for any reason and don’t receive a pension from your employer you can use form P50 which can be submitted online or through the post.
You should receive a P800 from HMRC to confirm the value of your tax refund which can be claimed through the free HMRC app or your personal tax account.
Generally speaking at the end of a tax year in which you have been made redundant checking your eligibility for a refund of tax is sensible so keep any P45 or P60’s in a safe place for when you need them.
What happens to my redundancy if my employer no longer exists
In cases where you are unable to receive redundancy from your employer directly you can contact the insolvency service which is a government office that supports people with redundancy issues.
How much is Statutory Redundancy pay?
Statutory redundancy is paid if you have been with your current employer for over two years.
At the time of writing the current statutory redundancy payments are:
- Half a week’s pay for each full year while you were under the age of 22.
- One week’s pay for each full year while you were between the ages of 22 and 40.
- One and a half week’s pay for each full year you were aged 41 or older.
From the 6th April 2022 the maximum statutory redundancy pay you can get is worth £17,130 with a cap of £571 on your weekly pay. If you were made redundant before the 6th April 2022 your statutory redundancy pay will be lower.
You can use the free government statutory redundancy pay calculator to work out the value of your redundancy pay.
Who is not entitled to statutory redundancy pay
There are some circumstances where you would not eligible for statutory redundancy.
Statutory redundancy is not applicable for the following people:
- Crown servants, members of the MOD or Police.
- Former registered dock workers and share fishermen.
- Domestic servant who is an immediate family member of the employer.
- You have been dismissed for misconduct.
- Apprentices who are not employees at the end of their training period.
Other arrangements can be in place to replace statutory redundancy.
I need help with my redundancy pay
When you are made redundant what you will be paid should hopefully be clear to understand and received without complication.
If this is not the case and you do not agree with your employer you can ask Citizens Advice for help for free.
Your contract of employment is always helpful and you can get a copy if you need one from your employers human resources department.
You can double check most relevant points relating to your redundancy with your contract of employment including holiday pay, commission and bonuses.
We hope you receive your redundancy pay without a problem and find a new and better way of making money soon.
