Date posted: 12th Aug 2024
Being made redundant is an unsettling time, without the extra stress of considering whether the taxman wants to take a slice of your settlement.
The starting point is to assume that the full payment is taxable and then ascertain whether the £30,000 exemption can be utilised, if the conditions are met.
The £30,000 exemption only applies to the compensatory element of any payment – so statutory redundancy and genuine payments made by your employer to compensate you for loss of employment.
Payments in lieu of notice (PILON’s) are always taxable because you were always entitled to that payment, even if you worked your notice. Transferring company assets (such as cars) can cause tax implications. Payments in relation to restrictive covenants are also taxable as are final wages payments, bonuses and holiday pay for holidays not taken.
It is therefore an urban myth that anything under £30k, is tax free.
If there are taxable elements then you will need to consider how this may impact your overall tax position, for the tax year, especially if you get another job or expect to get another job, shortly afterwards.
Some considerations include:
- You could end up earning over £60,000 and paying back some or all of your family’s child benefit.
- You could end up earning over £100,000 and losing some or all of your personal allowance. The same would apply to any childcare tax reliefs and free hours.
- You may end up paying tax on interest income that was previously considered to have been covered by your available interest savings allowances.
- You could direct that your employer pays some of the taxable element of the pay into your pension scheme to save tax – however, traps for the unwary include making sure that you have sufficient unused pensions allowances to avoid incurring a tax charge on the pension contribution paid by your employer.
- You may be subject to the tapered annual pension allowance.
If you are nearing retirement age, HMRC may also query whether the redundancy is actually a goodwill retirement payment and may not qualify for the exemption but there are exemptions where payments are made on the ground of ill-health or disability.
If you wish to take tax advice on a redundancy payment, contact our expert team.
