Over the years we at ESDG Accountancy have helped many high earning individuals declare redundancy payments correctly on their personal tax returns. This guide covers the £30,000 tax-free allowance, reporting requirements, tax-exempt disability or injury payments, taxable excess, and other key considerations to ensure compliance with HMRC.
The £30,000 Tax-Free Redundancy Allowance
HMRC allows the first £30,000 of a redundancy payment to be exempt from income tax and National Insurance contributions (NICs). This applies to statutory redundancy payments (calculated based on your age, length of service, and weekly pay) and non-statutory or enhanced redundancy payments, provided they are directly linked to the termination of your employment.
For example, if you receive a £27,000 redundancy payment, the entire amount is tax-free. However, if your payment totals £41,000, the first £30,000 is tax-free, and the remaining £11,000 is subject to income tax and potentially NICs, depending on the payment structure. This tax-free allowance can offer significant financial relief during redundancy, but it’s crucial to understand how it works to avoid unexpected tax bills.
Reporting Redundancy Payments on Your Tax Return
While the first £30,000 of a redundancy payment is tax-free, you still often need to declare it on your Self-Assessment tax return, especially if you receive payments exceeding this threshold or have other income sources. Any amount above £30,000 is treated as taxable income and must be reported to HMRC. Failing to declare taxable redundancy payments could result in penalties or interest charges.
For instance, if you receive a £52,000 redundancy payment, you must report the £22,000 taxable portion on your tax return. This amount is added to your other income for the tax year, potentially pushing you into a higher tax bracket (20%, 40%, or 45%).
Preparing a tax return during redundancy can feel daunting. At ESDG Accountancy, we specialise in accurate Self-Assessment tax return preparation for individuals and businesses. Let us handle the details so you can focus on your next steps. Reach out to our team to ensure your tax obligations are met seamlessly.
Tax-Free Payments for Disability or Injury
In addition to the £30,000 redundancy exemption, payments related to disability or injury are entirely tax-free, with no upper limit. If your employment ends due to a disability or injury, any compensation directly tied to these circumstances is exempt from income tax and NICs. This includes payments for:
• Injury to feelings resulting from discrimination or unfair treatment linked to your disability.
• Physical or psychological injuries sustained during your employment.
• Compensation for loss of employment due to a disability that prevents you from continuing in your role.
For example, if you receive a £55,000 payment for a workplace injury that led to your redundancy, the entire amount could be tax-free, separate from the £30,000 redundancy allowance. HMRC closely examines these payments to confirm they qualify as disability or injury-related compensation. Proper documentation, such as medical records or a settlement agreement, is essential to support your claim.
Our team at ESDG Accountancy can assess whether your redundancy package includes tax-free disability or injury payments. We’ll liaise with HMRC to ensure compliance and help you maximise your tax savings. Schedule a consultation today to explore your options.
Taxable Excess: What Happens Beyond £30,000?
Any redundancy payment exceeding the £30,000 tax-free threshold is subject to income tax and, in some cases, NICs. The taxable portion is treated as employment income and taxed at your marginal rate (20%, 40%, or 45%, depending on your total income for the tax year). For example:
• A £46,000 redundancy payment means £30,000 is tax-free, and £16,000 is taxable.
• If you’re a higher-rate taxpayer (40%), you’d owe £6,400 in income tax on the £16,000 taxable portion.
Employers often deduct tax at source through PAYE, but the amount withheld may not align with your final tax liability, especially if you have other income or if the redundancy payment pushes you into a higher tax bracket. Consulting a professional accountant is key to ensuring accuracy.
At ESDG Accountancy, we provide personalised tax planning to minimise your liability and prevent overpayment of tax on redundancy payments. Contact us to discuss your situation and discover how we can help you keep more of your money.
Additional Considerations for Redundancy Payments
Beyond the core tax rules, several other factors are worth considering when receiving a redundancy payment:
1. Pension Contributions: Some redundancy packages include payments to your pension scheme, which may have separate tax implications. Our accountants can help you understand their impact on your retirement planning.
2. Non-Cash Benefits: If your redundancy package includes non-cash benefits, such as a company car or continued health insurance, these may be taxable as benefits in kind. We’ll help you calculate the tax due and report it correctly.
3. Timing of Payments: Redundancy payments made across different tax years can affect your tax liability. Strategic timing can help you stay within a lower tax bracket, and our team can advise on the best approach.
4. Settlement Agreements: Many redundancy payments are formalised through settlement agreements, which outline the terms of your departure. These agreements often include tax-free and taxable components, and our accountants can review them to ensure you’re getting the best deal.
5. Future Employment: If you’re moving to a new job or self-employment, your redundancy payment could impact your tax position in the current or future tax years. We offer tailored advice to help you plan ahead.
Can we help with your tax return?
Please send an enquiry below if you would like help with a personal tax return:
/
