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Is a redundancy payment tax free? Whether you are made redundant by your employer or volunteered for it, this guide will give you clarity, especially if you also wonder if voluntary redundancy faces different taxation rules. Read on.
Types of Redundancy Pay
Redundancy payments in the UK come in two types: statutory and contractual.
Statutory Redundancy Pay
- the legal minimum an employer is required to pay employees who have been continuously employed for at least two years
- currently capped at £21,000 (2024/25)
- non-negotiable and must be provided if an employee faces redundancy due to genuine business needs
- determined by a formula based on the employee’s age, length of service, and weekly pay
- without specific references to redundancy, this is what employees will receive by default
Contractual Redundancy Pay
- goes beyond the legal minimum (£21,000 limit) and may be specified in an employee’s contract or staff handbook
- can lead to a larger payout amount or compensation, even for those who have not completed two years of service
- pay terms vary by employer
Either your employer made you ‘redundant,’ or you volunteered—anyhow, the tax implication of the pay hinges on how much you receive. Contractual redundancy arrangements can pay more as it has no limit. Be sure to thoroughly review your employment contracts or handbooks to identify any provisions regarding redundancy payouts.
Do you know? Redundancy pay is one form of employment termination payment but can be used interchangeably with ‘termination’ or ‘severance payment.’
Is a Redundancy Payment Tax Free UK?
The rule of thumb on redundancy pay is anything above £30,000 is taxed. Since statutory redundancy pay is capped at £21,000, it is usually tax-free. Contractual pay can be bigger, so it is most likely to attract taxes.
Note that redundancy pay may also come in a package. Other parts of the package are naturally treated as ‘ordinary incomes,’ hence incur the same income tax and National Insurance. Whether the tax-free limit of £30,000 is exceeded or not, they are taxed normally.
Taxable elements in a severance pay package usually include the following:
- earned holiday compensation
- payments in lieu of notice (PILON)
- non-monetary benefits and perks
- outstanding salary
- incentives or commissions
- additional hours pay
If you receive a bigger redundancy pay, check this out: How Much Tax Will I Pay on 60,000 Redundancy?
Is Voluntary Redundancy Payment Tax Free?
Voluntary redundancy does not directly affect your tax implications, as the latter mainly hinges on how much redundancy pay you receive. As discussed above, as long as the amount stays within £30,000, it remains tax-free.
Be sure to check, however, if your termination pay comes in a package, as other parts in the package may be naturally taxable (see the above list). Consult with a tax advisor to accurately determine which elements in your redundancy pay package are taxable or not.
The Right for Voluntary Redundancy
- You can express your interest in redundancy, but your employer is not obligated to accept your offer.
- You can either respond to a voluntary redundancy request from your employer or formally volunteer in writing.
- Your employer will assess the business’s needs and may refuse if your skills are deemed essential.
- If accepted, your employer must provide details about your notice period (statutory or contractual) and ensure continued payroll pay during this time.
- Engage with your employer for clarity on unused holiday, benefits during the notice period, and the possibility of leaving early.
- If you suspect discrimination regarding your ability to volunteer, seek guidance to protect your rights.
Useful read: How to Get P45 Form: Guide for PAYE Workers. If you are quitting your job for another, you will need a copy of your P45 form, as well as your new employer. This ensures streamlined Pay as You Earn (PAYE) tax treatment in your job transition.
You will also need this document when claiming refunds on your personal tax returns. HMRC may owe you a tax refund on overpaid tax on redundancy pay.
Financial Strategies for Jobseekers
Here are some tips to keep in mind:
Maximise Redundancy Pay. Use your redundancy payment wisely, considering putting part of it into a pension to potentially bolster your retirement savings, especially if you are facing temporary unemployment.
Understanding Benefits. Research and apply for Universal Credit and Jobseeker’s Allowance (JSA) to support your finances after redundancy. Note that your redundancy pay may impact eligibility and the amount you receive.
National Insurance Contributions & Marginal Rate. Ensure you are up to date with National Insurance contributions, as these affect your entitlement to contributory benefits. Be mindful of your marginal rate, as higher redundancy payments can influence the amount of taxable income you may declare.
FAQs on UK Redundancy Payment
Yes, you can appeal against a redundancy decision by writing to the Director of Organisation Development & Policy within 7 working days. The appeal will be heard by an Executive Director with support from HR and legal officers, and their decision will be final.
You may be considered for a suitable alternative role if one exists, but your employer is not required to create a new position. If you are on maternity leave, it is advisable to seek advice, as you are typically entitled to preferential treatment for available roles.
Yes, you can lose your statutory redundancy payment if you unreasonably refuse an offer of suitable alternative employment. Additionally, other circumstances such as dismissal for misconduct may also result in forfeiting this payment.
Some employers do offer enhanced redundancy payments, typically in exchange for signing a PAYE settlement agreement.
Authorized causes for redundancy include situations where a position is no longer necessary due to changes in the business. Other causes can be retrenchment for personnel reduction due to losses or the closure of the business, either permanently or temporarily.
Get Tax Advice from Legend Financial
Is a redundancy payment tax free? The answer is clearly no, as you have a limit of up to £30,000, and anything above that, you are taxed. Be sure to know how much tax you will be paying on your redundancy pay so you do not get caught off-guard come tax billing time. Legend Financial is here to help you work out your tax liabilities and ensure compliance with HMRC. Talk to our tax accountants today!
