What is a redundancy payment?
Redundancy payments are made to individuals who have lost their jobs, and are a form of compensation. They can be made in cash or benefits in kind.
Depending on the nature and amount of payment, this will determine the outcome and the payment will be either fully taxable, partially taxable, or fully exempt. Planning is important as a significant sum can take your income above £100,000. This is where you can suffer an effective tax rate of 60% and begin losing your tax-free allowance. Furthermore, you will need to register for self-assessment with HMRC and file a tax return.
Redundancy due to past and present lockdown restrictions
The recent lockdown measures have introduced new fears about job security and income loss. Thousands of workers in the UK have been in this unfortunate position, with the pandemic already claiming in total 171,998 British jobs and putting many at risk. This does not include more than 100,000 job cuts from companies that have not put a figure on UK job losses, with this second lockdown we are looking to expect even more redundancies.
For businesses, part of this response, unfortunately, must include cost-cutting measures. The nature of the virus will mean that employers may need to consider adapting their usual redundancy procedures. Employees should still be given the right to be ‘accompanied’ to redundancy meetings (if that is your normal practise), even if such meetings are carried out remotely and/or virtually. With the rise of job losses, businesses need to offer the right procedures to its employees.
Finding out your whether or not you will be charged tax on your redundancy payments, and by how much is crucial during this time of uncertainty. Calculating this will allow you to figure out how money you will have and plan for the future. This is particularly important if you are planning on starting your own businesses with your redundancy money, as many people are during this pandemic and have done before in other periods of economic downturn.
Check out our recent article: The Start-Up Business Guide
How could you be charged tax on your redundancy payments?
It is your employer’s responsibility to tax your redundancy payments correctly and therefore, the employer bears the risk of penalties if the treatment is wrong. Apart from earnings which are always taxable, the first £30,000 of your redundancy package is likely to be exempt. However, it is important to be aware of these points.
Income tax and NIC due on the payment, how does your employer deal with this?
As with your wages, your employer should deal with the tax and National Insurance Contributions (NIC) due on any taxable parts of your redundancy package, but the exact treatment and any action you need to take will depend on the timing of the payment.
- Your employer should issue you with form P45 when you are made redundant.
Payments in lieu of notice -applicable from 6th April 2018
From 6th April 2018, any element of the termination payment that relates to a PILON is taxed as general earnings and are subject to income tax and national insurance.
Up until 5th April 2018, contractual payments in lieu of notice (PILONs) were taxed as earnings, whereas non-contractual PILONs could fall under the £30,000 exemption and were often treated as termination payments.
Payment made before your employment ends
If your redundancy payment is made before you leave your job and before your employer issues you with a P45, any taxable amounts, such as unpaid wages and any part of a redundancy payment over £30,000, should be included in your final payment and you will be taxed using your normal tax code.
Payment after your employment ends
If your taxable redundancy payment is made after you leave your job and your employer has already issued a P45, your employer will use an 0T tax code against any taxable amounts. This means you will be treated as having no personal allowance. The employer will take off tax at the appropriate rates before paying you the balance.
Remember, this will only affect you to the extent that your package contains taxable elements, such as unpaid wages, or if your redundancy payment is over £30,000. In this situation, you may overpay tax on redundancy payments, but you will be able to reclaim any overpaid tax.
Will the tax my former employer deducts be correct?
It will depend on factors like how much of your termination package was taxable, how accurate the tax code your former employer used was and your other tax affairs. If your redundancy payment is made before your employment ends and you do not gain employment again within that tax year, you may have overpaid tax. The scale of the refund will also depend on how far through the tax year you were made redundant.
You are at high risk of overpaying tax if your redundancy payment is made after your P45 has been issued and your employer applies the tax code 0T. It will depend on how taxable your termination payment is and the level of your other taxable income in that tax year.
If I get another job or become self-employed, how do I claim a tax refund?
If you are newly employed within the same tax year, you must receive your P45 as soon as possible. Any tax under or overpayment should then be corrected through the PAYE system and adjusted through your payslips. If you’re on an emergency tax code, any under or overpayment may not be fully settled until the tax year has ended and HMRC can process all your information.
Alternatively, if you have started your own business or you’re completing a tax return for another reason (rental income for example), you can include the taxable elements on your tax return.
If I remain unemployed after my redundancy, how do I claim a tax refund?
Claiming Jobseeker’s Allowance (JSA) or Universal Credit (UC)
If you are claiming jobseeker’s allowance (JSA) or universal credit (UC) – you must give your form P45 to the Jobcentre as soon as you claim the allowance.
They will use this to work out whether you will be entitled to repayment when you stop claiming or once the tax year ends on 5th April, whichever comes first.
- Important notice; JSA is taxable; UC is not taxable.
If you are not claiming Jobseeker’s Allowance or Universal Credit
If you are not claiming JSA or UC and will be unemployed for over four weeks, you will need to fill in ‘form P50 – claim for repayment of tax when you have stopped working’ and send it to HMRC with parts 2 and 3 of your form P45 (or your P45 and details of any post P45 payment) or complete the online version of the form, using the Government Gateway.
Payment into a registered pension scheme or an employer-financed retirement benefits scheme (EFRBS) as part of arrangements for the termination of employment is fully exempt from tax subject to your annual allowance. Making a termination payment to such pension schemes, rather than to the employee directly, is very effective tax planning and is commonly used.
Subject to the level of your UK earnings, annual and lifetime allowances you could make personal pension contributions in the same tax year. The annual allowance is £40,000 but, this could reduce to £10,000 depending on your level of income.
- You also may have unused allowances brought forward from previous years.
If you would like to find out the possible options that are available to you regarding pension contributions, you should speak with an independent financial adviser.
How can Maple Accountants help you?
Are you being charged tax on your redundancy payments? Every situation is unique therefore gaining the right guidance for you will be a huge asset if the national lockdown does affect your job or your business. At Maple, we are expert business accountants and we specialise in tax planning and minimisation. We can help you recover overpaid tax you may have been subjected to and help prepare your tax returns. To find out more about Maple, or to arrange a free appointment, visit our website or contact us at email@example.com or 01332 207336.