14 October 2021
Do you pay tax on redundancy pay

On 30 September, the UK’s furlough scheme came to an end. Since its introduction in March 2020, it has helped to support more than 11.5 million employees. While the majority of those employees are now back in their roles, around a million people were still relying on the scheme in September 2021.

We are expecting to see a turbulent fallout as the country deals with the end of the scheme. A leading UK thinktank predicted a rise in unemployment of up to 150,000 people as those who were on furlough are made redundant by their employers.

Fortunately, whether furloughed or not, there are specific rights in place for any employee who has been made redundant. This article will look at the financial impact of redundancy, and more specifically what tax you can expect to pay if you have been made redundant.

What redundancy pay am I entitled to?

If you have been employed by your employer for 2 years or more continuously, you will be entitled to statutory redundancy pay by law. You will only receive redundancy pay if it is considered a ‘genuine’ redundancy – meaning that you have lost your job because there was a genuine need to make redundancies in your workplace.

If you are entitled to statutory redundancy, the amount you receive will depend on your age and how long you have worked for your employer. You can work out what you’re entitled to here.

In addition to statutory redundancy pay, you may also receive contractual pay. This will be highlighted in your contract or staff handbook, and your employer is required to tell you what you’re owed, how the figure is calculated, and when the payment is received.

Contractual redundancy will be highlighted in your contract – check staff handbook maybe. Your employer is required to tell you what you’ll get, how it is worked out, and when you’ll get it.

If you feel you have been treated unfairly by your employer, reach out to your legal adviser or get in touch with our employment advice team for guidance on who to speak to next.

Will I pay tax on my redundancy pay?

You won’t pay any tax on your redundancy pay up to £30,000. Anything above this amount will be subject to tax and national insurance. However, it’s possible that your employer’s payroll will deduct the tax as standard. Approach your accountant or HMRC to ensure you can claim back anything you have overpaid.

It’s worth noting that this tax relief is applicable to redundancy pay specifically and not any other pay owed.

This means that you will still pay tax on any accrued holiday pay, any payment in lieu of notice (PILON), any owed wages, or any bonuses you may receive. This will be subject to tax and national insurance at the usual rate.

Advice for employers making redundancies

Redundancies are difficult for both the employees and the employer. Due to the pandemic, a lot of small and medium enterprises are having to make cutbacks in their staff in order to make ends meet – and without the support of furlough in place, are unfortunately having to make some hard decisions.

TBL can ensure you’re following the right advice when it comes to making redundancies, including supporting with payroll and redundancy pay.

How do I work out tax on redundancy pay?

We recommend working out the exact redundancy figure plus any other payments owed before your employment comes to an end, as well as how much tax you will owe on this figure. This can be a tricky calculation, but TBL are payroll experts and can help you make sure that you are getting everything you are owed without being overtaxed.

Furlough

Many furloughed employees agreed to take a reduced wage whilst on furlough. If this is the case for you, your employer may work out your redundancy entitlement based on your reduced rate rather than your contractual rate. If this is the case, get in touch with TBL to discuss what you should do next to ensure you do not over pay tax on your redundancy package.

 

It is always best to discuss anything that you’re unsure of with an expert. TBL are here for you – get in touch today to discuss any concerns you have around the end of furlough or redundancy packages.

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