If you have recently been made redundant and are receiving a redundancy payment you may be uncertain about whether it is taxable.
Redundancy pay is handled differently from regular PAYE income, with some redundancy pay taxable and other redundancy payments tax free.
After you have been paid your redundancy pay depending on a few different factors you may overpay tax and be due a tax rebate or in some cases underpay and have to pay HMRC more tax.
Understanding if your redundancy pay is taxable and if you have to pay tax on other redundancy related payments (like holiday pay) will help you avoid an unexpected tax bill and plan your finances with confidence moving forward.
What redundancy pay is tax free?
Workers who are being made redundant can receive a tax and class 1 national insurance free payment of up to £30,000 which HMRC call a “qualifying termination payment”.
The taxable redundancy threshold will include your redundancy pay, any unpaid salary, outstanding holiday pay and company benefits.
It’s important to know that unpaid salary, holiday pay and company benefits combined with your redundancy payment can take you over the £30,000 threshold.
Any redundancy pay 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).
What redundancy pay is 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 income 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 but won’t qualify for tax purposes unless the £30,000 threshold is met.
Taxable redundancy cash benefits
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.
Tax payable on redundancy over £30,000
In cases where you have received redundancy pay of £30,000 or more your employer should tell HMRC.
HMRC should then inform you that you need to pay additional tax on your redundancy and will advise if you need 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 pay 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 a tax rebate on your redundancy pay
You will not automatically be due a tax rebate just because you have paid tax on your redundancy payment.
A common reason for being owed a rebate is when you haven’t used up your personal allowance.
This can happen when you are made redundant fairly early on in the tax year and are unable to find more work during the same tax year.
There are two main options to reclaim tax paid on a redundancy payment:
- 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 forms or P60’s in a safe place for when you need them.
Taxable redundancy 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 your 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.
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.
The maximum statutory redundancy pay you can get is worth £19,290 with a cap of £643 on your weekly pay.
These figures can be changed an you can use the free government statutory redundancy pay calculator to work out the most up to date 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.
