Understanding Tax on Redundancy Payments

Employees facing redundancy and employers who need to understand the tax treatment of redundancy payments.

Explains the tax-free limit on redundancy payments and how statutory redundancy pay is calculated, helping both employees and employers ensure the correct payments are made.

Understanding the tax-free threshold and the statutory redundancy pay entitlements ensures employees don’t overpay tax, while employers remain compliant with redundancy regulations.

If redundancy strikes, you could receive up to £30,000 tax-free. Whether it’s statutory or a more generous employer offer, understanding your entitlements and the latest caps on weekly pay can make a real difference to your finances.

Tax-Free Redundancy Pay Limit

There is a tax-free threshold of £30,000 for redundancy payments, regardless of whether the payment is your statutory redundancy pay or a more generous amount offered by your employer.

Who is Entitled to Redundancy Pay?

If you have been employed for two years or longer and are made redundant, you are typically entitled to redundancy pay. The legal minimum you are entitled to receive is known as “statutory redundancy pay.” However, there are exceptions to this entitlement, such as if your employer offers to retain you in your current role or provides suitable alternative employment, and you refuse the offer without a valid reason.

How Statutory Redundancy Pay is Calculated

The amount of statutory redundancy pay is determined by your age and length of service, and is calculated as follows:

• Under 22: Half a week’s pay for each full year of service.
• Aged 22 to 40: One week’s pay for each full year of service.
• Over 41: One and a half weeks’ pay for each full year of service.

Weekly pay is capped at £700, with a maximum of 20 years of service considered. The maximum statutory redundancy payment for the tax year 2024-25 is £21,000, with slightly higher limits applicable in Northern Ireland.

The cap on weekly pay for redundancy calculations is expected to increase in April 2025, though details have yet to be announced.

Higher Redundancy Payments

Employers may opt to offer a higher redundancy payment, or you may be entitled to an increased amount based on the specific terms outlined in your employment contract.

Real-World Application

Employees should check their redundancy pay entitlement based on their length of service, age, and employment contract. Employers should ensure compliance with statutory redundancy pay laws and consider offering a higher payment if stipulated in the employment contract.

Risks and Consequences

Employers failing to provide the correct redundancy pay could face legal consequences. Employees may also have a claim for additional payments if the redundancy pay falls short of what is required by law.

Next Steps

If you believe you are not receiving the correct redundancy pay, it’s important to review your employment terms and seek advice. Employers should ensure they are offering the correct redundancy pay and review their obligations regularly.

Support With Redundancy Pay and Tax Calculations in London

Tax-free redundancy payments can provide financial relief during a challenging time, but it’s essential to understand the criteria to avoid unexpected tax liabilities. Cigma Accounting, based in Farringdon in London, helps individuals determine whether they qualify for tax-free redundancy pay and ensures it is processed correctly, with expert support from our experienced tax accountant London team.

While redundancy payments are tax-free up to a certain threshold, amounts beyond this limit may be subject to tax. Individuals living or working around Shoreditch and Clerkenwell often need guidance on whether their redundancy pay qualifies for tax exemption, and with physical offices across London, Cigma Accounting provides trusted advice and accounting services London to help ensure your redundancy pay is treated properly and in line with HMRC guidelines.