Genuine redundancy payments are taxed at special rates, and part of the redundancy payment can be paid 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.
What redundancy pay is payable?
How much is paid?
| Length of service | Redundancy payment |
|---|---|
| Less than 3 years, but more than 2 | 6 weeks |
| Less than 4 years, but more than 3 | 7 weeks |
| Less than 5 years, but more than 4 | 8 weeks |
| Less than 6 years, but more than 5 | 10 weeks |
Do you have to pay tax on statutory redundancy?
As before the statutory redundancy payment is tax-free. However, tax may be payable on any additional ex-gratia payment, subject to certain reliefs. It is best practice for employers to apply the correct tax treatment to employee payments including the highest exemptions possible to ensure employees receive the correct maximum net amount.
What’s the limit on how much you can pay for redundancy?
The £30,000 limit applies to one particular job and can be carried forward to be used against any later redundancy payments from the same job. There are two examples which explain this in more detail: Sally – payment by instalments in two tax years.
Is there a cap on redundancy payments for 2020?
As we are into a new tax year, if we assume you take no other employment then you are capped at £40,000 for 2020/2021 tax year. Fortunately that’s not the end of the story, as we are allowed to backdate contributions to previous tax years going back 3 years.
How are Redundancy Payments reported on the income statement?
Your employer will report the tax-free amount as a lump sum on your income statement or PAYG payment summary – individual non-business. Certain redundancy payments are tax-free up to a limit based on the number of years you worked for that employer.
