Redundancy: Do you get Taxed on Redundancy? Your Pay Rights and Refunds
22nd July 2020
In uncertain times, it’s only natural that businesses get a bit twitchy. The last couple of years have been pretty brutal for some parts of the economy, from the collapse of construction giant Carillion to the long shadow of a bumpy Brexit. The Maplins Mishap, the Toys R Us Tumble – the list of fallen Big Brands goes on. And now there's COVID-19 to throw into the mix. Up to 200,000 high street store jobs are predicted to be lost in the next couple of years. Meanwhile, the building trade is still staggering to shoulder the weight after losing one of its key load-bearing members.
With businesses getting battered up and down the country, the threat of redundancy tends to hang overhead. It can be pretty painful when your job gets kicked out from under you, but it might not be as bad as it seems. At the very least, there are a few ways to limit the damage – like claiming back a tax rebate, for instance.
What are my rights after redundancy?
One of the main things to remember when your employer drops the redundancy bomb on you is that you’ve got a few rights to fall back on. Perhaps the biggest of these is statutory redundancy pay. If you've been working at the same place for at least two years before redundancy, you're entitled to a payout set by the government. You get this by law, so if it looks like you’re getting the boot without it, it’s time to kick up a fuss.
There are a few exceptions to statutory redundancy pay eligibility, mostly based on the kind of work you do. You can find out more about redundancy pay and your rights on the government website Assuming you’re eligible, though, you can even claim your statutory redundancy pay if you’ve been temporarily laid off (without pay or on less than half a week’s pay) for either:
- More than 4 weeks in a row.
- More than 6 non-consecutive weeks in a 13 week period.
In this case, you’ll need to write to your boss to let them know you’ll be claiming your statutory redundancy pay. You’ve got to do it within 4 weeks of your last non-working day in the 4 or 6 week period you’re claiming for.
How much will I get in statutory redundancy pay?
You'll normally be entitled to statutory redundancy pay if you're an employee and you've been working for your current employer for 2 years or more.
- Half a week’s pay for each full year you were under 22.
- One week’s pay for each full year you were 22 or older, but under 41.
- One and a half week’s pay for each full year you were 41 or older.
Length of service is capped at 20 years. If you were made redundant on or after 6 April 2020, your weekly pay is capped at £538 and the maximum statutory redundancy pay you can get is £16,140. If you were made redundant before 6th April 2020, these amounts will be lower.
What if the company I was made redundant by has gone bust?
Even if the company's gone bust, you can still get your payout. In that case, though, you'll need to claim it from the Redunancy Payment Office. You can get Form RP1 from the government website to do this.
Is my redundancy payment taxed?
Technically, yes – but realistically, no.
The £30,000 Tax Free Exemption
The good news is that the threshold for paying income tax on your redundancy pay is pretty high at £30,000. The not-so-good news is that you're likely to be getting a lot less than that. The maximum your employer can be forced to pay you is £15,750, which is well under the £30,000 threshold.
As for National Insurance, you probably don't need to worry about that either. No NI comes off your basic redundancy pay. If you get other perks in your package, though, they might get bitten into. We're mostly talking about things like payments instead of notice, here. If you get something that isn't cash included in your package, the taxman will work out its value. If it takes you over the £30,000 limit, you'll be taxed on it.
A few things to keep in mind:
- Holiday pay is taxed as normal, and your standard NICs apply.
- If you've got an occupational pension, it's taxed as normal but without NICs.
- If you're fired for misconduct, you're out of luck and don't get anything.
Is my redundancy package taxed automatically?
Depending on your employer's set-up, your redundancy package might be taxed before you get it. If it isn't, you'll probably have to sort it out with the taxman yourself.
If you get the money before you got your P45, any tax will probably be included in that. If not, you might get given a 0T tax code. That's like not having a tax-free Personal Allowance for your payment, so you might end up having to reclaim some cash from HMRC. Of course, all of this only matters if you're getting enough to be paying tax on it at all. Depending on your situation, being owed a refund might actually be a fairly nice problem to have.
I’m being made redundant. What should I do?
If you're lucky enough to get some notice before being made redundant, there are a few things you can do to soften the blow. Obviously, looking for a new job is probably the most important one. Beyond that, though, it's worth making sure you aren't losing out unnecessarily.
What is the Notice Period for Redundancy?
There are statutory notice periods in place for employees, but it's always worth checking your contract of employment too.
The statutory notice periods for redundancy are:
1 week's notice: If employed between 1 month and 2 years
1 week's notice for each year: If employed between 2 and 12 years
12 week's notice: If employed for more than 12 years
How to Check your Contract of Employment
When you were first employed you should have been asked to sign a Contract of Employment and been issued with a copy to keep. If you don't have this, ask your HR department to supply you with a copy. You'll want to use this to check you're getting any redundancy pay you're entitled to, as we talked about above. You should also check if you've still got any outstanding holiday pay, bonuses or commissions owed to you.
Can I Claim any Benefits if I've been made Redundant?
Depending on your situation, you might be able to claim things like Housing Benefit, Jobseeker's Allowance or Universal Credit while you are job hunting so it's worth checking what you're entitled to.
Why might I be owed a tax refund after redundancy?
What a lot of people don't realise is that being made redundant may also mean you're owed some tax back for the year. When HMRC works out your tax code, they base what you pay each month on your expected full year's earnings. Redundancy part-way through a tax year could well mean you're eligible to claim a tax refund. If you're only out of work for a few weeks between jobs, your new employer can probably help sort it all out. If it's longer, though, you'll have to take it up with the taxman himself. That's where RIFT comes in.
As for how much you're owed, it'll depend on what you earned during the tax year. To get your overpaid tax back after redundancy or stopping work, you'll need a P50 form from HMRC. You'll also need some paperwork to back up your refund claim, so keep your P45 handy. HMRC will use it to work out a new tax bill for you.
There are a few things to watch out for when you're chasing up what the taxman owes you. If you aren't expecting to go back to work any time soon, but then do, you can run into trouble. It's easy to burn through your entire tax-free Personal Allowance and suddenly find yourself paying tax on your whole income.
Won’t my tax refund be handled automatically by HMRC?
If you’re claiming a state benefit that’s taxable after redundancy, your tax refund will probably be taken care of without you having to make a claim. HMRC should have all the information they need from your P45 to do it automatically. The same goes when you move quickly into another job after being made redundant in your previous one. It should all go through the Pay As You Earn system without much fuss when you give your new boss your P45.
What can RIFT do to help me after redundancy?
As with everything else to do with tax, your best bet for bouncing back from redundancy is with professional help. If you're already a RIFT customer, we can make sure you find the silver lining of your employment cloud. If you're not, the best guidance and practical help in the tax business is only a phone call or email away.
For example, more and more people are using their redundancy money to set up their own businesses. If you're looking to go self-employed, you'll start paying your tax through Self-Assessment instead of having it taken out of your wages via PAYE. If you want to check if you have to submit a Self Assessment tax return, our Self Assessment calculator can help you. We can also do your Self Assessment return for you, to make sure you don’t get stuck paying too much tax.
If you're in the building trade and thinking of setting up your own, you'll need to register for CIS (the Construction Industry Scheme) as well. We'll get that all sorted for you. We'll also help you claim your CIS tax refund each year and file your annual tax return. It's worth around £2,000 a year for most of our customers, so don't forget to ask for that money back.
A change in your employment status doesn't have to be a disaster, as long as you don't miss out on what you're entitled to. Have a word with RIFT. We'll quickly explain where you stand, and make sure the taxman always plays fair when it comes to your tax rebate.