If employees are facing redundancy, or considering voluntary redundancy, they need to know exactly how much money they will receive within their redundancy payments.

Unfortunately, the answer is not straightforward. Some parts of a redundancy payment will be tax free, while other parts will not.

Calculating your redundancy payment

The first step will be to check your contract of employment. See what it provides for in terms of the overall redundancy package.

The statutory redundancy payment

If an employee has a minimum of two years’ continuous service, their statutory redundancy pay is calculated as follows:

• half a week’s gross pay for each year of employment up to the age of 22
• one week’s gross pay for each year of employment between the ages of 22 and 40
• one and-a-half weeks’ gross pay for each year of employment over the age of 41.

At the time of writing, the maximum amount of statutory redundancy pay is £16,140, while the length of service paid is capped at 20 years.

These statutory caps are reviewed every year on April 6th.

An employer can choose to pay more than the statutory minimum (a non-statutory redundancy payment) but not less.

Tax treatment of redundancy payments 

Redundancy pay is compensation for your job loss. As such, up to £30k of it is tax free. This applies to a statutory or non-statutory (where the employer has paid more in accordance with the contract of employment) payment. This is because the payment is regarded as a compensation payment.

However, there is a distinction to be made. The £30k exemption only applies to payments made on the termination of employment that are not payments of earnings.

What is meant by ‘payment of earnings’?

These are payments normally made as part of the employment, i.e. wages and salary. They are not the same as a statutory redundancy payment, which is made on termination to compensate the employee. The statutory redundancy payment itself is tax free, but other payments of earnings will not be.

Different payments of earnings

Payments in lieu of notice

Some redundancy situations will require the employee to carry on working throughout the notice period. In other situations, an employee may leave early, or even straightaway.

In the latter situation, a payment in lieu of notice needs to be paid. Payments in lieu of notice may or may not be subject to tax and National Insurance (NI).

If the employee’s contract of employment provides for payment in lieu, this will normally be treated as payment of earnings. If the employer does not give proper notice and pays damages as a result, that is likely to be tax free (up to the £30k limit).

Holiday pay

Accrued holiday will normally be considered payment of earnings, making this sum subject to tax and NI.

Overtime and bonuses

Depending on the terms of the contract of employment, a redundancy package may include overtime and bonus payments. These will be subject to tax and NI contributions.

Bonus or overtime pay is calculated by taking an average of wages received over the previous 12 weeks.

Other benefits

Other non-contractual payments may be included under the tax-free redundancy allowance. However, if these payments are not considered part of the normal weekly wage, they will not qualify for tax exemption. Even if they do, they may take the payment over the £30k tax-free threshold.

Who is responsible for paying the tax?

The employer will usually deduct tax and NI contributions, but employees still have a responsibility to ensure these are correct. Because of the nature of the calculations, employers may not always get it right. It is always important to double check.

There is a general assumption that the first £30k of a redundancy payment is tax free. As you can see, the situation is not that straightforward and careful consideration is always required.

If you are due a redundancy payment, or payments, you may be concerned that your employer has not accurately or clearly informed you of what is owed. You may even be worried that proper redundancy procedure has not been observed.

If this is the case, our team of expert employment solicitors will be happy to provide advice. Why not get in touch today?