Being Tax Efficient With Redundancy Payments

There are two financial settlement approaches that an employer may take with you if they make you redundant.

A.  Statutory Minimum Redundancy Payment

This is the minimum payment by law that you should receive from your employer when made redundant provided you have worked for your employer for at least 2 years.  It is based upon:

• Your age.
• Number of complete years you have worked for your employer.
• Maximum number of complete years worked is capped at 20 years.
• Maximum weekly wage used in calculations is your average weekly wage for the last 12 weeks.
• Maximum weekly wage used is capped at £571 per week (tax year 2022/23).

Minimum statutory payment

• Age below 22 = minimum redundancy 0.5 week’s ‘average’ pay for each complete year.
• Age 22 to below 41 = minimum redundancy 1.0 week’s ‘average’ pay for each complete year.
• Age 41 and over = minimum redundancy 1.5 week’s ‘average’ pay for each complete year.

B.  Enhanced Redundancy Payment

Your employer may opt to offer you an enhanced redundancy package over and above statutory minimums, but you should take note of the taxation position below to help you decide or negotiate any redundancy package.

Taxation of Redundancy Pay

• Redundancy payments up to £30,000 are tax free. 
• Redundancy pay can be sacrificed and taken as pension contributions instead are tax free (provided pension annual allowance limits are not exceeded).
• Redundancy payments in excess of the £30,000 tax free limit are taxable.
• Other payments such as unused holiday pay, PILON (payments in lieu of notice), and any restrictive covenant payment e.g., not being allowed to work in a particular industry or for a competitor firm for a period, are also all taxable.

Hidden Tax Traps on Redundancy

• Remember for any taxable part of redundancy pay plus holiday pay, PILONs and any restrictive covenant payment may take you into higher tax brackets of 40% and 45%.
• If your total pay package for the year, takes you above £60,000 you are no longer entitled to child benefit (if you have children) and you will be required to pay it all back.  If your total pay package for the year takes you to between £50,000 and £60,000 you will some child benefit on a sliding scale and will be required to pay some of it back.
• Personal Savings Allowance:  Basic rate taxpayers have a tax-free savings allowance of £1,000 pa, this reduced to £500 pa for 40% higher rate taxpayers and £0 for 45% additional rate taxpayers.
• Remember the starting point for 45% income tax is currently £150,000, this reduces to £125,140 from April 2023.
• If your total pay package for the year, takes you above £100,000 then for every £2 over £100,000 your personal tax allowance of £12,570 is reduced by £1.  This means that is your total package for the year exceed £125,140 then you lose all your personal allowance meaning an effective tax rate of the £25,140 excess over £100,000 of 60%.
• If your total pay package for the year, takes you above £200,000 (threshold income) then this brings in a Tapered Pension Annual Allowance check.  This means that any employer pension contributions are added back into your salary, and you exceed £240,000 (Adjusted Income), then for every £2 over the Adjusted Income threshold your Pensions Annual Allowance is reduced by £1.  This means that your Pensions Annual Allowance could be reduced to just £4,000 pa if your adjusted income is £312,000 or higher.

Consider Pension Contributions

• If your employer will allow it, you could ask them to substitute some of your enhanced redundancy pay for pension contributions.  This may reduce income tax overall as well as potentially protecting you from above issues with protecting Child Benefit, Personal Savings Allowance, loss of Personal Allowance, reduction of Pension Annual Allowance.  This will also save on any employer national insurance contributions too.
• If your employer will not consider additional pension contributions, then there is nothing to stop you making your own pension contributions to get tax relief and again protecting some of the above allowances.

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