If you’re one of the departing employees made ‘redundant’ by your employer, you may be entitled to redundancy pay. One of the most popular questions we have collected from clients is: how much tax will I pay on 60,000 redundancy?
For a start, this is hefty pay, and you must know that any redundancy pay that exceeds £30,000 is taxed. Learn about your redundancy pay tax implications, plus tax-efficiency tips, to avoid getting shocked by your bill once you receive your payment.
Quick Guide to Redundancy Pay UK
Redundancy pay compensates 2+ years employees who lose their jobs because their role is no longer required. The minimum amount set by the government is called ‘statutory’ redundancy pay. You may receive more depending on your employment contract.
Any amount you get within £30,000 is tax-free. Take note that you might also receive other benefits that form part of your redundancy pay package but are considered regular income for tax purposes. They may include:
- holiday pay
- pay in lieu of notice (pilon)
- unpaid wages
- bonus or commissions
- overtime salary
Fun Fact: Redundancy pay is also used interchangeably with ‘termination’ or ‘severance payment’.
How Much Tax Will I Pay on 60,000 Redundancy?
Suppose you earn £60,000 redundancy payment. Added on top of your overall income, you may end up paying higher taxes. Assuming your annual income is £50,000, here’s how your redundancy pay taxation might look:
- Your first £30,000 is tax-free.
- The remaining £30,000 will be taxed at a marginal rate.
- With a £50,000 annual income, you fall into the higher rate tax bracket (40%).
- 40% of £30,000 is £12,000. This will be the tax you pay.
- The total redundancy pay you will get is £48,000 (£30,000 + £18,000).
If your earnings exceed £100,000, the calculations can become more complex, as you may lose part of your personal allowance, leading to a higher effective tax rate. Consult with tax professionals for accurate calculations and efficient strategies of receiving your redundancy pay.
How Is Redundancy Pay Tax Collected?
This depends on your circumstances. Usually, your employer must check with HMRC before paying. See which situation applies to you:
When you are paid before your employment ends. You will be taxed under PAYE, using your normal tax code. Tax and National Insurance contributions (NIC) will be deducted in your payroll as usual.
When you are paid after your employment ends. Your employer will use a 0T tax code, treating it as if you have no personal allowance. Tax will be calculated at basic, higher, or additional rates. You might overpay tax but can claim a refund for it from HMRC.
When your redundancy payment is delayed. If the payment is delayed and made in a later tax year, you will be taxed in the year you receive it. The £30,000 tax-free limit can be carried forward for the same job.
If you also wonder why your payslip does not show any tax deductions, check: Why Am I Not Paying Tax on My Wages UK?
Overpayment and Underpayment: What to Do
If your redundancy payment exceeds £30,000, your employer will usually deduct tax, but it may not be the correct amount. You might need to either claim tax refunds for overpaid tax or pay extra. Here’s what you can do:
- Tax is calculated annually, so if you stop working mid-year, you could overpay.
- Always check that your employer’s tax calculation is accurate.
- Notify HMRC if you believe the tax is incorrect.
- You may need to complete a Self Assessment tax return to pay any extra tax owed at the end of the tax year.
Visit relevant article Am I Owed a Tax Rebate UK? to see if HMRC owes you a refund.
How to Reduce Tax on Redundancy Pay
The secret to tax-efficient redundancy pay is this—contribute to a pension scheme once you learn your pay exceeds £30,000. Ask your employer to pay the excess into a pension scheme. You can use either workplace pension or personal pension.
This can save you from immediate income tax on that amount and allows the funds to grow tax-free. Your employer also saves on National Insurance by contributing to your pension instead of paying through PAYE.
Caveat: This is not one-size-fits-all advice, especially if you are far from retirement age. Currently, pensions can only be accessed at 55. Be sure to talk to a tax advisor before making significant financial decisions.
FAQs on Redundancy Payments
The statutory redundancy rate is based on age and years of service: 1.5 weeks’ pay per year after age 41, 1 week’s pay per year from age 22 to 41, and half a week’s pay per year before age 22, with a cap of 20 years of service.
How you receive your redundancy pay will affect your tax liability. While most people use pensions, it’s best to seek advice from professionals first.
Under the Protection from Redundancy (Pregnancy and Family Leave) Act 2023, pregnant women and parents receive better protection for being made redundant by their employers.
If you are made redundant, know that you have the basic redundancy rights, including receiving redundancy pay, a notice period, being given the option to move into a suitable role, and more.
Seek Advice from Legend Financial
How much tax will I pay on 60,000 redundancy? As always with tax, that depends on your unique situation. If you have received a notice of redundancy and information that you will get more than £30,000, act immediately so your tax bill will not eat into your pay. Legend Financial will help you make the right decisions. Talk to our tax experts today!
