What Tax Do I Pay on Redundancy Payments?

Currently, the economic disruption by the pandemic has caused many people to lose their jobs. You’d be called redundant if you lost your job because your employer wants fewer employees than the normal circumstances. In such a situation, you’d be entitled to redundancy payments on which you’re going to pay a certain amount of tax.

In this blog, we’re going to uncover: what is redundancy pay and how it is calculated, how your redundancy pay will be taxed whether you’d be paying National Insurance contributions (NIC) on it and so on.

But before going deep into the details, let’s start with the basics of redundancy pay.

 

What is Redundancy Pay and How It is Calculated?

You’ll be given statutory redundancy pay if you’re an employee working for an employer for a minimum of 2 years or more. How much you get depends on your wages, your age and the time you have worked in a company.

With the redundancy pay, you’ll get:

• Half a week’s pay for a full year of service (aged under 22)
• One week’s pay for a full year of service (aged between 22 to 41)
• One and a half week’s pay for a full year of service (41 or above)

The length of maximum service you’ll be paid for is capped at 20 years. If you’re furloughed due to the pandemic, the redundancy pay will be decided as per your normal earnings.

If you became redundant after 6 April 2024, the weekly pay is capped at £700 and the maximum statutory redundancy pay you’d receive is £21,000. For the people who were made redundant before 6 April 2024, the amount will be decreased.

To calculate it, you can use a step-by-step government calculator to know what amount you’ll receive.

Redundancy pay is not treated similarly to income. You need to note that the redundancy pay up to £30,000 is tax-free. However, some other parts of it like pay instead of notice and holiday pay will be worked out similarly as your regular income.

Eligibility for Redundancy Pay

To be eligible for redundancy payment you:

• Need to be an employee
• Have worked for a company continuously for a minimum of 2 years
• Have lost your job as your employer has to make redundancies

Tax-Free Redundancy Payments

The redundancy pay of £30,000 is not taxable. If you’re given a non-cash benefit like a car or computer, it will be added to your redundancy pay on which you’re liable to pay tax. The non-cash benefit might take your total redundancy pay above the £30,000 limit.

The Tax You Need to Pay on Redundancy Pay

In most cases, your employer will deduct taxes from the redundancy pay above the tax-free threshold. As a result, there are many chances of mistakes like underpayment or overpayment of tax. So you need to claim back or pay extra as per your circumstances.

Holiday Pay

This pay is treated similarly to wages. On this pay, tax and National Insurance Contributions (NIC) are subtracted from these payments before you receive them.

Bonus Payments and Wages Owing

You are liable to pay tax and National Insurance contributions against bonuses, unpaid wages or overtime payments you receive. You can receive this amount even after the end of your employment. If you receive regular commissions and bonuses on your employment, you need to keep track of them while working out redundancy pay by applying the average wage for the previous 12 weeks. In this way, these payments would qualify for a £30,000 tax-free exemption.  If these payments are not taken as employee’s normal weekly wages, then they won’t qualify.

Tax on Payments in Place of Notice (PILON)

You might be required to keep working until your notice period ends. However, if your employer wants you to leave or sometimes right after becoming redundant. In such cases, you will most likely receive Payment instead of Notice (PILON). This is compensation provided by your employer for ending your contract early.

The PILON are subject to income and National Insurance deductions. Along with this, all other non-contractual payments are going to be added to the £30,000 tax-free redundancy threshold.

Overpayment or Underpayment of tax

Your tax is calculated on an annual basis. So if you’ve stopped working before completing a whole tax year, you might overpay your tax. You can’t rely solely on your employer for the correct calculation of your tax. I

t can be more or less than the required limit. And you need to notify HMRC. In this regard, you might be required to complete a Self Assessment tax return at the of a tax year to pay any extra tax that is due.

What if Your Employer Doesn’t Pay You?

If your employer doesn’t pay you the redundancy amount that is due on them or hasn’t followed the way they should, you can follow these steps to get your redundancy pay:

• Write a letter to your former employer within six months of the end of your employment
• Contact an agent or advisory for a conciliation
• Go to the tribunal

How to Get Maximum Advantage From the Redundancy Payments?

If you think that your redundancy payment isn’t sufficient enough to meet your day-to-day expenses. It is advisable to invest/save it or pay off debt and another advantage you can avail from this amount is by contributing this amount to the pensions scheme.

Using Redundancy Payment for Pension

This option can prove to be tax-advantageous. If you’re a member of an employer’s pension scheme and you’re entitled to get a redundancy payment above £30,000, you can ask your employer to pay this amount into your pension to avoid paying tax.

Nevertheless, you need to remember that taxes and pensions are complex. As there are limits you need to pay to get the tax relief. Therefore, it is preferable to get the help of a financial advisor to avoid mistakes.

Conclusion

Hopefully, you have got sufficient information on the redundancy payments. If you’re entitled to redundancy, your employer will pay you on the last day of the notice period or shortly afterwards. If your employer doesn’t pay you within this time limit, you need to write to them asking for the payment. Still, if the employer refuses to pay, you should claim it to the tribunal within six months otherwise you may lose the opportunity to receive the payment.

Need more information, visit the government website.

 

Disclaimer: This blog is just for the basic information on redundancy pay.