Redundancy: Do you get Taxed on Redundancy? Your Pay Rights and Refunds
16th September 2022
When the economy's wheels start to wobble, businesses tend to get a little twitchy in the trigger finger. That's when people start losing jobs. The climb-back from COVID's been a rocky one, and has seen a lot of redundancies along the way. From big-name retail brands to construction giants, businesses all across the UK have been shedding jobs as they struggle to reorganise themselves. The threat of redundancy is hanging overhead for so many but, painful as it is, the loss of a job doesn't need to be a complete catastrophe. The damage can be limited by taking advantage of the help and resources on offer—like claiming back a tax rebate, for instance. Here's a quick breakdown of your redundancy rights.
What can I claim after redundancy?
Losing a job can feel like having your legs kicked out from under you, but it's essential to remember that you've got rights to fall back on. The first, and potentially the most immediately important, is the Statutory Redundancy Pay you're owed. As long as you've been working for the same employer for at least 2 years, the government says you're entitled to a payout. It's written into the law, so if your old boss looks like they're trying to get away without paying up, it's time to kick up a fuss.
A quick note of caution, though. There are a few loopholes in the rules that could see your claim for Statutory Redundancy Pay falling through. If you were sacked for misconduct, for example, that won't technically count as a 'redundancy', so you'll get nothing. You also can't get the payout if your employer offers to keep you on or if you refuse 'suitable alternative work' from them. There are even exemptions for certain kinds of job, like:
- Former registered dock workers and share fishermen.
- Crown servants, members of the Armed Forces or police services.
- Apprentices who are not employees at the end of their training.
- Members of the employer's immediate family who work as 'domestic servants'.
Those exceptions aside, being made redundant ought to entitle you to Statutory Redundancy Pay. In fact, you could even have a claim if your lay-off was only temporary (assuming it was either without pay or on less than half a week's pay). That rule kicks in if you're laid off either for over 4 weeks in a row or for any 6 weeks within a 13-week period. If you're claiming Statutory Redundancy Pay for this, you'll need to tell your employer about it within 4 weeks of your last non-working day or the 6-week period you're claiming for.
How much Statutory Redundancy pay can I claim?
Assuming you've been working for your current employer for over 2 years, you can claim:
- Half a week’s pay for each full year while you were under 22.
- One week’s pay for each full year while you were between 22 and 40.
- One and a half week’s pay for each full year you were 41 or older.
There's a hard cap to 20 years on your claim, when you're working out the length of your employment. If your redundancy happened on or after the 6th April 2022, there'll be a weekly pay is cap of £571, and the maximum Statutory Redundancy Pay your old boss can be forced to cough up is £17,130. If you were made redundant before then, you'll get less.
What if the company I was made redundant by has gone bust?
Your old employer going bust shouldn't make a difference to the Statutory Redundancy Pay you can claim. However, since you'll have to claim it from the Redundancy Payment Office instead. You can get the process started with Form RP1 from the government website .
Do I pay tax on my redundancy payments?
Yes, technically, your statutory Redundancy Pay is taxed. In real terms, though, it probably won't matter. Here's why:
The £30,000 Tax Free Exemption
There's a threshold for paying tax on Statutory Redundancy Pay, and it's a pretty high one. If your redundancy payout comes to under £30,000, you won't have to pay any tax on it. depending on how you look at it, this is either good or bad news. The up-side is that it's very unlikely that you'll get a payout high enough to pay tax on it. The down-side is, well, basically the same thing. In fact, the absolute most your employer can legally have to pay you is £17,130, as we mentioned above.
Of course, Income Tax isn't the only thing that takes a bite out of your pay, so let's have a look at National Insurance next. You won't have to pay any National Insurance Contributions (NICs) on your basic redundancy pay. However, if your redundancy package includes any other perks, then you might end up with some NICs taken out of them. Depending on your employer, those kinds of perks might include payments you get instead of notice or any kind of non-cash extras you're offered. For perks that aren't money, the taxman will put a value on them for you. If the total takes you over that £30,000 threshold, of course, you'll end up paying some tax.
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?
How you pay tax on your redundancy package (assuming you have to pay at all) will depend on your employer. Some businesses will take the tax out before giving you your payout, and others won't. If you get your redundancy pay untaxed, and you hit the threshold to pay tax on it, you'll need to sort that out with HMRC yourself.
If your P45 arrives after your Statutory Redundancy Pay, you'll probably find it's been included in that. If that doesn't happen for some reason, you might be issued a 0T tax code for it. That can be a problem, since the 0T code basically ignores your tax-free Personal Allowance. If you end up losing out to HMRC as a result, though, you can claim back what you're owed from the taxman.
Of course, as we mentioned before, all of these rules only kick in if you hit the £30,000 threshold to pay tax on your redundancy pay at all. Looking at it from that angle, getting a payout that big might actually be quite a nice problem to have.
I’m being made redundant. What should I do?
If you've got some advance warning that you're being made redundant, there are a few things you can do to help soften the blow. For one thing, you'll probably want to start looking for a new job straight away, rather than leaving it until after your current one ends. That's just the first step, though. To make sure you're getting the very best out of a difficult situation, you'll also need to check through your employment paperwork. Here are some of the main things to look out for:
What is the Notice Period for Redundancy?
Not every job has the same notice period—that is, the amount of time you're supposed to keep working for your current employer after you've been sacked, been made redundant or simply quit. You'll be able to get the exact period from your contract.
There are a few basic rules about notice periods, though. The basic statutory periods are:
- 1 week's notice: if you've been employed between 1 month and 2 years.
- 1 week's notice for each year if you've been employed between 2 and 12 years.
- 12 week's notice if you've been employed for more than 12 years.
How to Check your Contract of Employment
Always keep your contracts of employment. You should be given a copy by your employer to keep hold of when you start working for them. If you don't have one yet, or need a replacement, the Human Resources department at your work should be able to help.
Check through your contract if you're made redundant to make sure you're getting the redundancy package you're entitled to. While you're at it, check whether you're owed any holiday pay, commission or other bonuses before you leave. We're not saying your boss is out to cheat you, but these kinds of things can easily be missed when someone's leaving a job.
Can I Claim any Benefits if I've been made Redundant?
Yes, redundancies can mean you're entitled to claim some benefits Exactly what you'll qualify for will depend on your situation, but it might include things like:
- Jobseeker's Allowance or Employment and Support Allowance.
- Universal Credit.
- Pension Credit, assuming you and/or any partner are either old enough for the State Pension or getting Housing Benefit.
There's no shame in claiming everything you're entitled to after a redundancy, and all of these benefit can be a big help while you're finding your financial feet or hunting for your next job.
Why might I be owed a tax refund after redundancy?
When you pay your tax through the Pay As You Earn (PAYE) system, the taxman sets your payments at a rate that assumes you'll be earning steadily throughout the year. The total you'll end up owing for the year is then divided up across your monthly payments. If your job ends part-way through a tax year, however, it means the payments you've already had taken out of your earnings will have been too high. That's why you're very likely to be owed some tax back. If you're out of work for under 4 week between jobs, your new employer can probably help sort it all out for you. If you end up not working for longer than that, you'll have to tackle the taxman directly to get back what you're owed. That's where RIFT comes in.
Your tax refund will depend on how much you've earned during the tax year, and how much tax has been taken from it already. Your main weapon in the battle to claim it back is a P50 form from HMRC—along with some basic paperwork to back up your claim. Getting that paperwork to HMRC will allow them to recalculate your tax bill and settle up if you're owed money—but you might not have to do all the work yourself. If you start a new job within 4 weeks of your last day of paid work at your old one, your new employer should be able to sort out any refund you're owed using your P45. If not, you'll need to talk to HMRC to deal with it.
Will my tax refund be handled automatically by HMRC?
Again, this will come down to your situation. If you're getting any taxable state benefits, for instance, you probably won't have to make a tax refund claim yourself. HMRC should already have everything they need to process your refund automatically. As mentioned above, after a redundancy, your new employer will use your P45 to do this for you if you restart work soon enough. The PAYE system is built to handle this kind of thing, so make sure you get your P45 to your new boss as soon as possible.
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, contact us. 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.