How redundancy payment is calculated and taxes
You might be entitled to a redundancy payment if you are no longer in employment because there is no more work available. You will only receive the payment if only the redundancy is genuine. A genuine redundancy happens when your employer no longer needs your job due to changes in the operations of the company or organisation. Redundancy is not genuine if someone else is needed by your employer to occupy the same position and role.
There are two types of redundancy payments
Statutory redundancy payment – what you are entitled to by law
Contractual redundancy payment – what you are entitled to by contract of employment
You will be entitled to a statutory redundancy payment if you have worked continuously for at least two years with your employer, and if the reason to make you redundant by your employee was genuine.
Contractual redundancy payment is based on the employment contract to complement the statutory amount. By law, contractual redundancy pay cannot be less than the statutory redundancy pay.
How much statutory redundancy pay you can get
Redundancy payment is calculated based on your gross pay, that is, your earnings before the removal of any tax or National insurance. The amount you are paid depends on your age and how long you have worked for your employer.
The amount of your redundancy payment is:
Half a week's pay for each year of complete service in which you were aged 18-22
One week's pay for each year of complete service in which you were aged 22-40
One and a half week's pay or each year of complete service in which you were aged above 41
Limits to how much you can get
There is a service cap of 20 years for redundancy payments. This means that you can only get redundancy pay for a maximum service of 20 years. For instance, if you are made redundant after working for 25 years, you will only get redundancy payment for the last 20 years of service.
For statutory entitlement calculations, you can only get a maximum weekly amount of £538 even if you earn more than that per week.
The maximum statutory redundancy payment is capped at £16,140, and it is tax-free. Contractual redundancy payment by your employer up to £30,000 is also exempted from tax.
It is imperative to get your redundancy payment in full after being made redundant. Now that you know how redundancy payment is calculated, you can do your calculations and then cross-check with that of your employer to avoid possible underpayment or overpayment. Check your contract of employment to know if there are extra entitlements from your employer. You can use the redundancy payment calculator available on gov.uk to calculate your statutory entitlement.
However, your total redundancy package may attract tax or not. If you want to know whether you will pay tax or not on your calculated redundancy payment, you can check out our other blog post on "is redundancy payment taxable?"
Is Redundancy payment taxable?
“Do I have to pay tax on redundancy pay?” is one question that people ask when facing redundancy. Redundancy pay has a special tax treatment because it is paid as compensation for your job loss. However, any redundancy pay up to £30,000 is tax-free.
Your redundancy package consists of different elements, some of which are not exempted from tax and other deductions. Significant elements of your total redundancy package, which may include holiday pay, unpaid wages, and pay in lieu of notice, are classified as earnings and will be subjected to income tax and National insurance deductions.
What will I be taxed on?
You will be taxed on any redundancy pay above £30,000
Although the first £30,000 of any redundancy payment is tax-free, you could be entitled to non-cash benefits such as a company car or computer as part of your redundancy package. The cash value of these items will be added to your redundancy pay and subjected to taxation. If your total redundancy package is above £30,000, the excess of the limit is taxed.
Your employer pays you £25,000 as a redundancy payment. You also get to own the company car valued at £10,000. The cash value of the car is added to the redundancy payment, totalling £35,000. Note that only £30,000 is tax-free, and you will pay tax on the remaining £5,000.
Holiday pay, pay in lieu of notice, unpaid wages, and bonus payments
Work termination benefits given by your employer, which include holiday pay, pay in lieu of notice, unpaid wages and bonus payments are treated the same way as earnings. Therefore, they are subjected to income tax and National Insurance deductions before you get them.
If you are receiving a statutory £20,000 redundancy payment plus one month’s payment in lieu of notice worth £2,000, and holiday pay of £4,000. The redundancy payment is not up to £30,000, and it is tax-free. However, your employer will have to deduct tax and National insurance from £6,000 payment in lieu of notice and holiday pay before you get it.
Now that you know the maximum limit of redundancy payments before it is subjected to tax, you can use this as a guide to calculate how much of your redundancy payment that will be taxed. You can calculate your statutory entitlement together with other cash benefits from holiday pay, pay in lieu of notice, unpaid wages, and bonus payments on your employment contract.