Sort out tax matters when an employee leaves

Redundancy payments

Redundancy is a specific term for jobs lost because a business no longer needs to employ as many people. There are special tax reliefs for redundancy payments.

Taxable redundancy payments

Income tax deducted under PAYE (Pay As You Earn) applies to: 

• redundancy payments above £30,000
• payments to an employee who leaves under a restrictive covenant, eg that stops them working for a competitor
• sums over £30,000 which you are ordered to pay if an employee successfully sues for breach of contract, or unfair/wrongful dismissal

National Insurance contributions (NICs)

NICs are not due on redundancy payments but you should be clear that the payment is only redundancy. Download the leaflet on income tax and redundancy from the HM Revenue & Customs website (PDF), which has a table that shows whether or not tax or NICs are due.

Tax deducted under PAYE does not apply to legal costs incurred by an ex-employee in bringing a claim against you for compensation for loss of employment, and which you have been ordered to pay. In this situation, you should ask your HM Revenue & Customs office about Extra-Statutory Concession A81 or download the guide on extra-statutory concessions from the HM Revenue & Customs website (PDF), which gives further information on termination payments and legal costs.

Payments in lieu of notice may be taxable if they are referred to in someone's terms of employment, or if you have a custom of paying them.

Subjects covered in this guide

• Introduction
• What forms you need to fill in
• Standard payments
• Statutory Maternity, Paternity and Adoption Pay
• Taking account of student loan repayments
• Redundancy payments
• Employment tribunal awards
• Lump sum and non-cash payments

 

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