You'll receive your redundancy pay as a lump sum, and up to £30,000 is generally tax-free - so you wouldn't owe any income tax or National Insurance contributions (NICs). Tax on redundancy pay. For example, you may pay less tax if you get your severance pay as a salary continuance instead of as a lump-sum payment. Redundancies qualify for special treatment under tax law – you can receive up to £30,000 in redundancy pay without having to pay any tax on it. The statutory redundancy payment is tax-free. Deduct the amount of tax you have already paid from the £4,000 (using the example). This means your employer has made a decision that your job no longer exists, and your employment is to be terminated. Depending on your employment conditions, a genuine redundancy payment may include: The following payments are not included in a genuine redundancy payment: Any payments that meet the conditions of a genuine redundancy are tax free up to a limit based on your years of service with your employer. How much tax you pay is calculated on a yearly basis. is dismissed because they've reached normal retirement age, is their pension age or older on the day of dismissal. A genuine redundancy payment is a payment made to you as an employee if you're dismissed because the job you were doing has been abolished. For non-genuine redundancies, the whole-of-income cap generally applies. Any amount over the tax-free limit is part of the employee's ETP. Only £30,000 is tax free, so Kirandeep will pay tax on the remaining £10,000 – as she’s a higher-rate taxpayer, that’s 40%. They do not pay any National Insurance. So, if you’ve stopped working part way through the tax year, you might have paid too much. Get this from your final payslip or P45. Contributions paid into your pension qualify for tax relief at the highest level of tax you pay – so 20% for basic-rate payers, 40% for higher-rate payers and 45% for additional-rate … So you might need to claim tax back or pay extra tax. If you feel that our information does not fully cover your circumstances, or you are unsure how it applies to you, contact us or seek professional advice. Calculating the tax-free portion of your redundancy payment.  |  We are committed to providing you with accurate, consistent and clear information to help you understand your rights and entitlements and meet your obligations. How your redundancy payment is taxed The first £30,000 of a redundancy settlement is usually untaxed, although this figure can reduce in certain circumstances. It's mandatory for companies to make a minimum redundancy payment to employees who qualify for it by law (to those employees who have at least two years continuous employment). Your employer should deduct the tax and pay it on your behalf. If you follow our information and it turns out to be incorrect, or it is misleading and you make a mistake as a result, we will take that into account when determining what action, if any, we should take. Please note, any tax deducted due to the redundancy payment will … Working out the tax on your redundancy pay can be complicated so contact your nearest Citizens Advice if you need help. This is taxed as part of the current year's income. We use Cookies: By using this website, you consent to their use. If you end up owing tax on your redundancy pay above £30,000, you may be able to minimise your bill by paying into a pension. enquiries@maps.org.uk. Understanding how tax and redundancy payments work is crucial for ex-employees reporting the payments on their tax returns, and for ex-employers who need to calculate, report, and withhold tax. Your pension options if you’re made redundant, Top tips for making money when faced with job loss. A redundancy payment is taxable income, so you need to pay income tax on it. If you’re not sure how much redundancy money you’re entitled to, read our guide on, - Get free trusted guidance and links to direct support, Clear English Award - Opens in a new window, Money manager for Universal Credit claimants, Workplace pensions contribution calculator, Tax on Payments In Lieu of Notice (PILON), Avoid nasty shocks – work out the tax on your redundancy pay in advance, How to contact your local HM Revenue & Customs tax office, Claiming your tax rebate after losing your job, How much Income Tax and National Insurance you should pay, Tax and National Insurance when you're self-employed, We can’t separate money worries from our mental health, How Income Tax, National Insurance and the Personal Allowance works, Scottish Income Tax and National Insurance, Changing your career following redundancy, Employment contracts and your employee rights explained, Coronavirus – what it means for you and what you’re entitled to, Employed and furloughed: The coronavirus job retention scheme, Employed, off sick or self-isolating: claiming Statutory Sick Pay, How to fill in a Self Assessment tax return. If your taxable redundancy payment is made after you leave your job and your employer has already issued form P45, your employer will use an 0T tax code against any taxable amounts. This can be a problem particularly later in the tax year when workers have already received a large bulk of their wages. In recent years – due to tax changes – it has become more expensive to make termination payments. If you don’t need all your redundancy money to meet your living expenses, consider saving or paying off debts, or even contributing to your pension. Previously there was a second method based on your average rate of tax for the previous 3 years. if any of the ETP is tax-free Your employer will deduct any tax for you. If you are a member of your employer’s pension scheme and you are going to receive a redundancy payment of more than £30,000 then you may be able to avoid paying tax on the excess by asking your employer to pay it into your pension, provided they agree to this. 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