All other non-contractual payments are included in the £30,000 tax free redundancy pay limit. Applying the tax When you pay an employee you are making redundant a final termination sum, this is made up of these two … A redundancy payment is taxable income, so you need to pay income tax on it. If you’re not sure how much redundancy money you’re entitled to, read our guide on, - Get free trusted guidance and links to direct support, Clear English Award - Opens in a new window, Money manager for Universal Credit claimants, Workplace pensions contribution calculator, Tax on Payments In Lieu of Notice (PILON), Avoid nasty shocks – work out the tax on your redundancy pay in advance, How to contact your local HM Revenue & Customs tax office, Claiming your tax rebate after losing your job, How much Income Tax and National Insurance you should pay, Tax and National Insurance when you're self-employed, We can’t separate money worries from our mental health, How Income Tax, National Insurance and the Personal Allowance works, Scottish Income Tax and National Insurance, Changing your career following redundancy, Employment contracts and your employee rights explained, Coronavirus – what it means for you and what you’re entitled to, Employed and furloughed: The coronavirus job retention scheme, Employed, off sick or self-isolating: claiming Statutory Sick Pay, How to fill in a Self Assessment tax return. It's reported as a lump sum in the employee's income statement or PAYG payment summary – individual non-business. In cases of redundancy, pay instead of notice applies which means that a director may be eligible for up to 12 weeks additional redundancy pay. Working reduced hours as an alternative to redundancy, Cars, insurance and other employee benefits, How to start a business or become self-employed, Personal insurance when you’re self-employed, Business insurance when you’re self employed, Help and support for self-employed during and after coronavirus, What type of worker are you? : financial help during the coronavirus outbreak, Self-employed: financial help if you’ve lost business income, Self-employed: financial help if you’re sick or self-isolating. When determining the income tax and NIC treatment of a termination payment, we need to consider whether the payment is: Contractual or a specific type of payment which is taxable/NICable (e.g. The first £30,000 of your redundancy pay will also be free from tax and National Insurance payments. Redundancy pay (including any severance pay) under £30,000 is not taxable. Where these payments are not considered part of the employee’s normal weekly wage then these payments will not qualify. For non-genuine redundancies, the whole-of-income cap generally applies. Salary, holiday pay and PILON payments are generally fully taxable, and no part is tax free, even if the full £30,000 tax … Working out the tax on your redundancy pay can be complicated so contact your nearest Citizens Advice if you need help. Saturday, Sunday and Bank Holidays, closed. We are committed to providing you with accurate, consistent and clear information to help you understand your rights and entitlements and meet your obligations. Certain redundancy payments are tax-free up to a limit based on the number of years you worked for that employer. If you’ve received a genuine redundancy payment, part or all of it may be tax free. The tax-free limit consists of two elements: a base amount and an annual amount for each year of service, and both are indexed annually. How much tax should be taken from my pay? You’ll have to pay tax on a redundancy payment if it’s more than £30,000. This is effectively compensation for ending your contract early. The PENP amount is taxable as normal pay while the excess is only liable to tax and NI if it’s more than £30,000. (Indexed each year). Ex-gratia redundancy payments above the statutory redundancy amount are exempt from USC up to certain limits. Accept and close so is taxed. Tax on redundancy payments. is dismissed for disciplinary or inefficiency reasons. For 2016-17, the base amount is $9,936 and the annual service amount is $4,969. When determining the income tax and NIC treatment of a termination payment, we need to consider whether the payment is: Contractual or a specific type of payment which is taxable/NICable (e.g. Contributions paid into your pension qualify for tax relief at the highest level of tax you pay – so 20% for basic-rate payers, 40% for higher-rate payers and 45% for additional-rate … How your redundancy payment is taxed The first £30,000 of a redundancy settlement is usually untaxed, although this figure can reduce in certain circumstances. A non-genuine redundancy occurs when the employee: A payment for a non-genuine redundancy is taxed as part of the employee's ETP. Sorry, web chat is currently offline, our opening hours are. Your pension options if you’re made redundant, Top tips for making money when faced with job loss. You'll receive your redundancy pay as a lump sum, and up to £30,000 is generally tax-free - so you wouldn't owe any income tax or National Insurance contributions (NICs). Colin receives a redundancy payment of £18,000 plus one month’s pay in lieu of notice, totalling £1,000. If your employer is unable to pay your statutory redundancy payment an application can be submitted to this department for payment to be made through the Redundancy Payments Scheme. As such, if you are still unsure or are seeking more information on the implications of redundancies, it is advisable to consult an accountant or an employment or taxationlawyer. The limits are €10,160 plus €765 per full year of service in excess of statutory redundancy. With redundancies on the rise due to the coronavirus, is it time you understood how termination payments work in 2020? How your redundancy payment is taxed The first £30,000 of a redundancy settlement is usually untaxed, although this figure can reduce in certain circumstances. She also gets to keep her company car, which is valued at £8,000. There’s a legal minimum your employer must offer you as compensation for losing your job, but some companies offer more generous terms. Under these circumstances, you might receive Payment In Lieu of Notice (PILON). Check the amount of redundancy money you have received from your employer. Tax and your pay. This might then take it over the £30,000 limit. Redundancies qualify for special treatment under tax law – you can receive up to £30,000 in redundancy pay without having to pay any tax on it. Our general email address is This can be a problem particularly later in the tax year when workers have already received a large bulk of their wages. Where employment involves regular commission or bonuses then these can be taken into account when calculating redundancy pay using the average wage for the previous 12 weeks. Do you have to pay tax on your redundancy pay? This is particularly important in cases where some of the redundancy payment is treated as an ETP, gi… cookies policy. This is clearly marked. “Is my redundancy pay taxable?” is one of the first questions people ask when facing redundancy. See Overpayment or underpayment of tax below. Redundancy payments are treated as received when the employee becomes entitled to the payment and it's not therefore possible to spread the payment over two or more tax years. Deduct the amount of tax you have already paid from the £4,000 (using the example). If you have received a redundancy payment, the first £30,000 is tax-free, meaning that you will pay tax at the normal rate on any amount over £30,000 as this essentially counts as income in that tax year. The amount of tax you need to pay on your redundancy payment is therefore £2,000. Redundancy payments compensate you if you lose your job when that job no longer exists. Previously there was a second method based on your average rate of tax for the previous 3 years. a restrictive covenant) Exempt (e.g., in relation to disability or death) A payment in lieu of notice (PILON) Statutory or enhanced redundancy payment The age-based limit of 65 years old has changed to the age pension age (66 years old). Redundancy pay is calculated based on an employee’s normal weekly pay. Kirandeep receives a redundancy lump sum of £32,000. The amount of statutory redundancy is subject to a maximum earnings limit of €600 per week (€31,200 per year). We use Cookies: By using this website, you consent to their use. Calculating the tax-free portion of your redundancy payment. 3 and benefits from (and counts towards) the £30,000 tax-free threshold.  |  Redundancy payments are taxed at the lump sum rate. It's mandatory for companies to make a minimum redundancy payment to employees who qualify for it by law (to those employees who have at least two years continuous employment). Tax on redundancy pay. The limits are €10,160 plus €765 per full year of service in excess of statutory redundancy. Paying into a pension plan can be a tax-efficient option. A genuine redundancy payment is a payment made to you as an employee if you're dismissed because the job you were doing has been abolished. Understanding how tax and redundancy payments work is crucial for ex-employees reporting the payments on their tax returns, and for ex-employers who need to calculate, report, and withhold tax. In 2018-19, the ETP cap is $205, 000 and the whole-of-income cap is $180, 000. The tax-free amount is not part of the employee's ETP. Genuine redundancy payments are taxed at special rates, and part of the redundancy payment can be paid tax-free. 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