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Is redundancy pay taxable?

Is redundancy pay taxable?
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The threat of redundancy is a reality for many people in today’s employment market. However, there are some steps you can take to reduce anxiety. Preparation and education are key, so if you want to know whether redundancy pay is taxable, read on to find out.

What is redundancy pay?

If you lose your job and it is not your fault, you may be eligible for a compensation payment. This is known as redundancy pay.

There are two basic types:

  • Statutory Redundancy pay, which is given in accordance with your legal entitlement.
  • Contractual redundancy pay, which is given in addition to the statutory payment.

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Who can get it?

You will be entitled to statutory redundancy pay provided you fulfil the following criteria:

  • You have been employed by the same employer for two or more years continuously
  • Your job was terminated because there was a genuine need to make redundancies
  • You are classed as an employee

For further information on entitlement, check the gov.uk website.

How much is it?

The amount will depend on a number of different factors, such as your age and years worked.

Statutory redundancy pay

For each full year of employment, you will receive the following amount of pay:

  • Half a week’s pay if you are up to age 22
  • One week’s pay when aged between 22 and 40
  • One and a half weeks’ pay when aged 41 and older

If you turn 22 or 41 while working for your employer, you will get the higher rate for the period of time that you were at that age.

So if you worked for a total of two years, but turned 22 after one year, your statutory redundancy pay will be half a week’s pay plus one week’s pay.

There are limits on the amount of pay you will receive, including payment up to a maximum weekly amount of £544 and for a maximum of 20 years’ work.

If you want to know how much statutory redundancy pay you are likely to get, you can check this using the HMRC statutory redundancy pay calculator.

Contractual redundancy pay

This will depend on the company you work for and their policy on redundancy payments. The amount they will pay in the event of redundancy can often be found in your contract or in a company handbook.

Is redundancy pay taxable?

Redundancy pay is tax-free up to £30,000. You may receive a total redundancy package that includes equipment such as a computer or a company car. This will be given a cash value for tax purposes. You will need to include this in the total amount.

You will therefore be taxed on any amount which exceeds the £30,000 limit. So if your total redundancy package is worth £40,000, you will have to pay income tax on £10,000 of the total.

The tax will be taken from the redundancy package before you receive it. Check all paperwork and be prepared to contact HMRC, because overpayment of tax in this situation is common.

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What about other outstanding payments?

Although redundancy pay up to £30,000 is not taxable, any outstanding wages, holiday pay, bonuses and overtime payments will be subject to tax and national insurance contributions.

How can I avoid paying tax on my redundancy payment?

The best way to avoid paying tax on your redundancy is to put it in a pension scheme. If you are a basic rate taxpayer, the income tax will be automatically paid back into your pension scheme a few months after you make the deposit.

Take home

If you are under threat of redundancy and want more information on your redundancy rights during the Covid-19 pandemic, check out our article that covers what you need to know.

Additional information on your redundancy and your rights can be found on the gov.uk website.

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