Losing your job is probably the worst thing that can happen in this economic climate. Sadly, it has become a reality for many people with redundancies have become a reality for many people. One of the first questions that hit people is whether their redundancy pay is taxable. Since payments towards redundancy are paid towards a job loss, so there is a special tax treatment that it qualifies for. Up to £30,000 of the redundancy payment is tax free. However, what people don’t calculate is other components of their salary package that is also calculated as part of redundancy payment and those elements are taxable.
We cover redundancy payments in detail; who qualifies for these payments how much you get and how mach taxes you need to pay for payments you receive.
Qualifications and Exclusions
In order to qualify for a right to a redundancy payment an employee must have been continuously employed for two years at the relevant date at his company and the company where that person works should be registered. It is, of course, only employees who have a right to redundancy payments. As with the right to claim unfair dismissal there is an upper age limit. The right to a redundancy payment ends at the age of 65 years or a normal retirement age if that is earlier. In addition there are a number of situations in which employees lose their right to a redundancy payment.
- Employees who are dismissed with or without notice for reasons connected to their conduct.
- Employees who give notice to the employer terminating the employment with effect from a date prior to the date upon which the employer’s notice of redundancy is due to expire; in such a case employees may lose their right to a redundancy payment, although if the employees leave early by mutual consent the redundancy payment will not be affected.
- An employee who takes part in strike action after having received notice of termination. In such a case the employer is entitled to issues a notice of extension. This notice, which must be in writing and indicate the employer’s reasons, may request the employee to extend the contract of employment beyond the termination date by a period equivalent to the number of days lost through strike action. Failure by the employee to agree to this extension, unless he or she has good reasons such as sickness or injury, may enable the employer to challenge the right to a redundancy payment.
- Section 158 ERA 1996 enables the Secretary of State to exclude those receiving a pension from the right to redundancy payments. Those employees who have a right or a claim to periodical payments or lump sum resulting from pensions, gratuities or superannuation allowances, which are paid with reference to the employment or on the leaving of the particular employment, can be excluded.
- Certain specifically excluded categories of employee, such as public-office-holders and civil servants.
The Definition of Redundancy
According to Employment ACT 139(1) ERA 1996, employees are to be regarded as being redundant if their dismissals are attributable wholly or mainly to:
- The fact that the employer has ceased, or intends to cease, to carry on the business for the purposes for which the employee/s was employed.
- The fact that the employer has ceased, or intends to cease, to carry on that business in the place where the employees were so employed.
- The fact that the requirement of that business for employees to carry out work for a particular kind, or for employees to carry out work of a particular kind in the place where they were so employed, has ceased or diminished or is expected to cease or diminish.
Note: In this context ‘cease’ or ‘diminish’ mean either permanent or temporary and from whatever cause.
The House of Lords held that the definition of redundancy requires two questions of fact to be answered. These are:
- Have the requirements of the employer’s business for employees to carry out work of a particular kind ceased or diminished, or were they expected to cease to diminish?
- Was the dismissal of the employee attributable, wholly or mainly, to this state of affairs?
Calculating Redundancy Payments
The first £30,000 of any redundancy payment is tax free. This includes any statutory amount you receive under the Employment Protection (Consolidation) Act 1978, which is tax free. The amount of statutory redundancy your employer owes you is based on how long you have been continuously employed, your age and your weekly pay, up to a certain limit (£380 current maximum). You will get:
- 0.5 week’s pay for each full year of service where your age was under 22
- 1 week’s pay for each full year of service where your age was 22 or above, but under 41
- 1.5 week’s pay for each full year of service where your age was 41 or above.
So if you are 45, your weekly pay is £380 per well and you have completed 15 years’ full service, you will receive £6,460 statutory redundancy pay (1.5 weeks × 4 years full service ages 41 or over = 6 weeks plus 1 week × 11 years service age 41 = 11 weeks. Total 17 weeks × £380 (max weekly wage) = £6,460).
Charge to Tax
As discussed earlier, redundancy pay is free of tax up to the Inland Revenue current limit of £30,000. Any amount of your redundancy payment over this limit will be taxed at your normal rate of tax. However, if you should receive any payments which are not solely on account of your redundancy as defined by the Employment Protection (consolidation) Act, they may be subject to tax in full. For example, these would include payments which are a form of terminal bonus.
If your employer should offer you the services of an outplacement company, the cost of value of this service is not taxable, even when it brings the total value of the redundancy over the £30,000 threshold. Non-cash settlements that are part of the redundancy package like a company car or a laptop, will be given a cash value. This will increase your redundancy payment and in some cases take it above the £30,000 limit.
Case Study: James receives a redundancy payment of £31,000. He also gets to keep the company car which is valued at £7,000 and a laptop with peripherals which have a combined value of £1,000. The total redundancy payment now taxable is £39,000. From this amount only £30,000 is tax free. James will have to pay tax on the remaining £9,000.
Tax Savings on Redundancy Payments
A great way to save on taxes towards your redundancy payment is to pay it towards your pension. This is not only a great way to save tax, but also a tax-efficient option.
Offer of Alternative Employment
If, before the ending of a person’s employment, the employer or an association makes an offer in writing, to renew the contract or to re-engage under a new contract which is to take effect either on the ending of the old one or within four weeks thereafter, the following rules will apply:
- If the provisions of the new of renewed contract as to the capacity and place in which the person would be employed, together with the other terms and condition, do not differ from the corresponding terms of the previous contract.
- The terms and conditions differ, wholly or in part, but the offer constitutes and offer of suitable employment
- In either case the employee unreasonable refuses that offer, then he or she will not be entitled to a redundancy payment.
The burden is on an employer to prove both the suitability of the offer and the unreasonableness of the employee’s refusal
Reasonable Refusal by Employees of Alternative Employment
By way of contrast, in adjudicating upon the reasonableness of the employee’s refusal, subjective considerations can be taken into account like domestic responsibilities. In some cases the employee has refused offers of suitable employment on the grounds that they would not be able to do their work to a satisfactory standard in the reduced hours and with reduced staffing levels.
Key Points to Remember
- Employees are to be regarded as redundant if the employer has ceased or intends to cease carrying on the business for the purposes for which the employees were employed, or in the place where they are employed there has been, or will be, a diminution in the need for work of a particular kind.
- If there is no express term relating to mobility in the contract of employment, the tribunal will have to examine the evidence to consider whether one should be inferred.
- The burden of proof is on the employer to show that any offer of alternative employment was suitable and that any refusal by the employee was unreasonable.
- A trial period may be invoked to consider offers of alternative employment if there is likely to be a difference in terms and conditions of employment.
- The employer should give as much warning as possible of impeding redundancies to enable the union and the affected employees to take early steps to consider alternative solutions or possibly find alternative work in the undertaking or elsewhere.