Redundancy is a significant life event that can bring about both professional and financial concerns.
For employees facing redundancy, the question of whether their redundancy pay is taxable is a common source of confusion. So, is redundancy pay taxable in the UK?
In this post, we will share insights on:
The ins and outs of taxation and redundancy;
How taxation applies to redundancy pay.
Is redundancy pay taxable?
Up to £30,000 of redundancy payments are tax free, whether they are statutory or non-statutory redundancy payments.
However, this only applies to payments that are not payments of earnings, such as wages.
Any amount over £30,000 is be taxable.
So, if an employee receives £40,000 in redundancy pay, they will pay tax on £10,000.
How is redundancy pay calculated?
Statutory redundancy pay is calculated based on:
Age;
Weekly pay;
How many years an employee has been in a job.
Statutory redundancy is only payable if a person has worked for an employer for at least 2 years.
Employers sometimes offer an enhanced redundancy package. If this is the case, the details of when an employee qualifies for this, and how much they get, should be outlined clearly in the contract of employment.
What are classed as payments of earnings?
Payments of earnings are taxable, this includes:
Payments in lieu of notice;
Holiday pay;
Overtime;
Bonuses.
It's important to keep in mind here that tax free redundancy payments are those made on termination of the employee's contract as compensation.
Some payments, like the ones above, don't fall under this category and will be taxed as usual.
Others may be classed as compensation, but take the redundancy amount over £30,000, at which point it would be subject to tax.
How is tax on redundancy pay paid?
If redundancy pay goes over the £30,000 non-taxable amount, tax should be deducted in the usual way by the employer.
That's not to say employees shouldn't make sure they have paid the right amount of tax however.
Get legal help with redundancy settlements and pay
In conclusion, redundancy pay is tax-free up to £30,000. However, it's important to be clear on which payments fall into this bracket, and which don't.
Facing redundancy is never easy, which is why it's important for employees to know how to negotiate a redundancy settlement that works for them, how to spot a bad redundancy settlement, and their rights when it comes to the legal processes employers have to follow when making someone redundant.
If you are in the process of negotiating a favourable redundancy settlement or need advice on whether or not your employer has followed the right steps in terms of their redundancy procedure, our employment solicitors can help.
To get started, tell us about your case to get a free case assessment that includes:
Possible next steps;
Fixed-fee quotes for the help of an employment solicitor;
Estimated time scales.