If you are unfortunate enough to lose your job, your first concern is unlikely to be tax.
But the tax position on redundancy payments is far from simple and you need to ensure you don't pay too much.
If you are made redundant, you may receive different categories of money. Some are taxable in the normal way and others may be subject to a limited exemption.
Unused holiday
If you receive money in respect of unused holiday entitlement, this is treated as if it was normal salary and you will have to pay tax on it in the normal way.
Gardening leave You may be given what is known as gardening leave. When you are about to leave your job, your employer may decide you no longer need to come into the office - as you may use this as an opportunity to poach clients or former colleagues.
As a result, you will stay on the payroll even though you stay at home. During this period, your salary will continue to be paid as normal.
Statutory payments
If you receive such payments, then these will arise because of a statutory obligation on your employer.
They do not arise from your contract of employment. You generally only have to pay tax on your contractual entitlements. As a result, any sums payable under the statutory-redundancy scheme will be tax-free. But see the £30,000 limit below.
Ex gratia payments If you receive a payment to which you had no contractual entitlement, for example a 'golden handshake', then such an amount will initially be tax-free. But see the £30,000 limit below.
Payments in lieu of notice
This is where you will find most difficulties in practice. Most contracts will contain a clause specifying the notice period your employer must give to terminate a contract of employment.
This is often one month but can be longer, especially if you have a senior position. Suppose you have an annual salary of £24,000 and your contract specifies your employer must give you one month's notice.
Suppose also that you are to be made redundant and you are told that rather than make you wait a month, you will be released now.
As you are entitled to a month's notice, your employer must compensate you for cutting short your notice period. You will obviously be happy to accept £2,000 (one month's salary).
But since this £2,000 comes from a separate agreement (rather than your contract) this amount will be tax-free.
But see the exceptions and the £30,000 limit below.
You cannot always rely on a payment in lieu of notice being tax-free.
Perhaps your contract specifies your employer must give you a certain number of months' notice but reserves the right to pay you an equivalent sum in lieu.
In such cases, any amount you receive in lieu of notice will be as a direct result of your contract and taxable. Even if your contract does not specifically give your employer the right to pay you in lieu of notice, you may find any payment will still be taxable.
This will happen if your employer had a tradition of making payments in lieu of notice so that you had an expectation of such a payment.
If that is the case, you will have to pay tax on the payment as it was effectively part of your contract.
The £30,000 limit
Suppose you have received a payment that appears to be tax-free. This will represent either statutory redundancy payment, a payment in lieu of notice or an ex-gratia payment.
The tax legislation does not allow all the money to be received completely tax-free. Instead, it says if you receive money when you leave a job, and it would not otherwise be taxable, then it is still subject to tax. However, the first £30,000 will remain tax-free.
National Insurance
Generally speaking, National Insurance will be payable by you and your employer on your earnings and therefore payable on any part of your redundancy that's subject to tax.
However, if part of your redundancy package is covered by the £30,000 exemption then no National Insurance is payable on that part - even if the £30,000 threshold is exceeded.
Finally
No advice has been provided to you. This is a general overview of redundancy and is for information only.
All statements concerning the tax treatment of products and their benefits are based on our understanding of current tax law and Inland Revenue practice. Levels and bases of, and reliefs from taxation, are subject to change.
- Jacques Pienaar is an independent financial adviser with Ian Cooke and Partners, 31 Queens Road, Brighton. 01273 205511.
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