Are redundancy payments taxable?

Being made redundant from employment can be a stressful time for anyone. It can be a time that is filled with uncertainty and a preoccupation with the future. Redundancy payments are made to employees that are being made redundant to compensate them for the loss of their job. If you are being made redundant it is important that you are across the details of your redundancy payment – such as the tax that you are due to pay – to avoid getting into trouble.

When you are made redundant, you will be eligible to receive a sum of money from your employer to compensate you for the redundancy. This is known as a redundancy payment. The question of whether you must pay tax on this sum of money is not a simple ‘yes’ or ‘no’ answer, it is a little more complicated than that. By knowing the details about the tax on your redundancy payment, you can not only ensure that you are paying correctly but also get a better idea of what to expect should you be made redundant.

Calculating your redundancy payment

Regardless of whether you are taking an imposed or voluntary redundancy, you will receive a redundancy payment. For more information about how much you will receive, you should first check your contract.

The law stipulates that there is a minimum value that the employer must pay to you. If you have been working for a company for over two years continuously, minimum payments are calculated as follows:

  • Employment up to the age of 22 years old – half a week’s gross pay for every year worked
  • Employment between the ages of 22 and 41 years old – one week’s gross pay for every year worked
  • Employment over the age of 41 – one and a half week’s gross pay for every year worked

Length of service is capped at 20 years, and a week’s pay is calculated as the average week’s pay that you received in the previous 12 weeks before you received your redundancy notice.

There is also a cap on your statutory redundancy pay. This is calculated by the government each year. As of 6th April 2022, this cap is £17,130 (£571 weekly). If, however, you were made redundant before then, older rates will apply.

How much redundancy payment is tax-free?

Taxation on redundancy payments can be complicated. These redundancy payments are in place to help to compensate you for the loss of your job, and up to £30,000 of this money is tax-free. This is the case for both statutory and non-statutory payments – due to the fact that it is meant as compensation.

When you are made redundant, you might also be eligible for another payment – known as ‘payment of earnings’. Payment of earnings amounts, however, is tax-deductible.

What does ‘Payment of Earnings’ imply?

The term, ‘payment of earnings’ refers to payments that are wages and salary – or payments from your employer that are not compensation. This amount includes payment for any holiday or overtime and bonuses.

There are several different types of ‘payment of earnings’ categories. These include:

  • Accrued holidays
  • Overtime and bonuses (according to the employment contract)
  • Payments in lieu of notice – this may or may not be taxed according to the terms of the contract
  • Other payments – remember that if these take you over the £30,000 threshold, you might have to pay tax on it

Who oversees the paying of tax?

The ultimate responsibility of ensuring that the tax is paid on redundancy payments is the employees. However, in most cases, the employer will deduct the necessary tax when the payment is made.

It is recommended, however, that you check this as the system is quite complicated and mistakes can be easily made.

Contact Waldrons Solicitors

Here at Waldrons, we have a team of experienced solicitors who can help you Contact us today to discuss your circumstances.

More information on Employment Law

Back to all Insights