The redundancy process can be very stressful. The uncertainty of not knowing which elements of redundancy pay are taxable and how much money you’ll be left with at the end can definitely add to the stress.
In short, you won’t pay any tax on your statutory redundancy payments and qualifying enhanced redundancy payments up to the £30,000 tax-free threshold. However, you will have to pay tax on the other elements such as pay in lieu of notice (PILON), holiday pay and non-qualifying enhanced redundancy.
In this post, I’ll run through which elements of redundancy can be aligned to this tax-free pot and which are taxed as regular income.
How is Statutory Redundancy Taxed?
You only qualify for statutory redundancy if you have worked for the company for over two years. I’ll explain how to calculate it further in the post, although the maximum statutory redundancy pay is £544 per week and £16,320 in total.
All of this statutory redundancy can be applied to the £30,000 tax-free pot so any statutory redundancy is not taxed.
How is Enhanced Redundancy Taxed?
Enhanced redundancy is additional redundancy payments made on top of the statutory minimum. Payments of enhanced redundancy are tax-free up to the £30,000 threshold, with any excess subject to tax and national insurance contributions.
It is worth noting that in some cases, some or all of the enhanced redundancy can be taxable as earned income depending on the wording of the contract. This can happen if there are any contractual conditions that are required to be completed by the employee to be entitled to the benefits.
Ideally, try and avoid setting conditions within the redundancy package. If this isn’t possible, try separating it into unconditional redundancy payments and conditional termination bonus payments made upon the completion of defined criteria.
How is Voluntary Redundancy Taxed?
Voluntary redundancy is taxed in the same way as regular redundancy, with each element described throughout this post. There is no difference between voluntary and forced redundancy if they are on the same terms.
Voluntary redundancy may have different enhanced benefits, often higher to incentivise people to take it and save having to go down the forced redundancy route. If these benefits are conditional they could incur tax so make sure you fully understand the implications of accepting the voluntary redundancy.
How is Pay in Lieu of Notice Taxed? (PILON)
PILON payments are made when an employee is not required to work their full notice period, however, is entitled to the payment of this time. This payment is regarded by HMRC as ‘flowing from the employment’ and is taxed as earned income, so does not benefit from the £30,000 exemption.
Pay in lieu of notice (PILON) can sometimes be difficult to determine which parts can benefit from the £30,000 tax exception as a number of different elements can form this payment.
Difference Between PILON and Gardening Leave
People often get confused between PILON and gardening leave. The main difference being that whilst on gardening leave you remain an employee of the company and can’t get another job, often to protect the interests of the company.
An employee that receives a PILON payment does not have any notice period and is free to find a new job immediately. Both gardening leave payments and PILON payments are taxed as regular income and don’t benefit from the £30,000 tax exemption.
How is Holiday Pay Taxed?
Holiday pay is taxed in the same way as salary, as earned income. This means tax and national insurance will be dedicated as usual in line with your tax rate.
Redundancy Tax on Non-cash Benefits
As part of your redundancy package, you may be given or allowed to keep certain things such as a laptop or company car. Non-cash benefits are able to be used against the £30,000 tax exemption and are calculated based on their cash equivalent value.
For example, if you are allowed to keep your company car that is valued at £4,000, this is tax-free as long as your total tax-free redundancy total doesn’t add up to more than £26,000.
An exception to this rule is on loans that are waived as part of the redundancy. This means if you have a loan with the company that you are no longer obliged to pay back, you are taxed on this as regular income even if the value of your total redundancy package is below the £30,000 threshold.
How Are Unpaid Wages and Salary Taxed in Redundancy?
Any salary and unpaid wages are classed as normal payments of income under your employment contract so are taxed as earnings and don’t benefit from the £30,000 tax exemption.
How is Tax Calculated on Redundancy Payments?
To start with, you only qualify for statutory redundancy pay if you have been an employee for over two years. Statutory redundancy pay will then depend on the employee’s age and how long they’ve worked at the company, with a maximum benefit of up to 20 years.
Statutory redundancy is calculated by working backwards from the day their notice starts, applying the following:
- one and a half week’s pay each full year the employee was over aged 41
- one week’s pay each full year the employee was over aged 22 but under 41
- half weeks pay each full year the employee was under aged 22
A weeks pay is calculated as their normal weekly pay before taxes, often referred to as gross weekly pay.
To calculate your weekly pay there is a handy page on the GOV.UK website here. This is particularly helpful if you work shifts or get bonuses where your pay is different week to week.
This statutory redundancy is then added together with any qualifying enhanced redundancy including the value of any non-cash benefits. If the total figure is below £30,000 the money is tax-free.
Tax on Redundancy Over £30,000
If you have a redundancy package that is over the £30,000 tax-free threshold, you must pay tax on everything above It at your marginal tax rate. You don’t have to pay National Insurance on this money.
Tax and national insurance are deducted from any other non-qualifying payments and benefits as they are treated as earned income.
Using Pension Contributions to Lower Your Redundancy Tax Payments
Paying into a pension can be a tax-efficient option when receiving redundancy payments. Any contributions paid into your pension qualify for tax relief at the highest rate of tax you pay.
- 20% for basic rate tax payers
- 40% for higher rate tax payers
- 45% for additional rate tax payers
If you are a member of your employer’s pension scheme and expect a redundancy payment of over £30,000, it may be advantageous to put the excess into your pension to help reduce your tax burden.
There are limits on how much you can put into your pension so make sure you take this into consideration as well.
Redundancy Package Tips
If you are given the opportunity to negotiate your termination package, try and make the best use of the £30,000 tax exemption. A popular way to do this is by requesting compensation payments wherever possible instead of payments in earnings.
How to Claim Tax Back on Redundancy Payment?
When you are made redundant, your employer should calculate your final redundancy payout and deduct any taxes that are due.
It’s definitely important to not assume your employee has got the calculations correct. If you believe they are wrong it’s up to you to notify HMRC.
To find out if you’ve paid too much tax you can use the tax checker on the Gov.UK website and remember to include any taxable benefits you’ve claimed since losing your job, such as job seekers allowance.
Overall, redundancy tax can be a difficult subject, especially when considering other pressures. The question, is redundancy pay taxable, is definitely popular due to the various complexities surrounding the process. I’m hoping this post will allow you to be more equipped to understand the various terms that will be used throughout the process.
I also want to highlight that your redundancy pay will most likely be sent in one lump sum and knowing how you’re going to spend it and how long it will last will help you plan your next steps.
To help here I recommend reading this post on how to create a budget. Knowing that your money both in savings and redundancy pay could last you 6 months, or even years will definitely help reduce the stress and give you some breathing room to make the right decisions going forward.
This post is intended as guidance to help with increasing knowledge around redundancy tax. If you need specific actionable advice please contact a financial advisor that will be able to give you advice on your personal situation. It may also be worth reaching out to your HR department as there may be help available through your employer.