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Redundancy payments to be taxed from April 2018

From April 2018, redundancy payments made ‘in lieu of notice’ will be taxed at the employee’s highest rate of income tax.

Doug Perry, partner at chartered accountants Clayton & Brewill explains how both employers and employees will feel the impact of the forthcoming changes to  redundancy payments.

At the time of writing (December 2016), redundancy payments up to £30,000 are free of both income tax and National Insurance (NI).

Under the plans set to come in in April 2018, the statutory element of a redundancy payment – ie: the part that an employer is required to make by law – will remain tax-free. However, the other element of a redundancy payment, the payment in lieu of notice, which will be hit with both income tax and National Insurance.

This is part of the HMRC’s drive to align tax and NI, so that whenever an income tax payment is made, NI will also be payable.

For many workers, it is the payment in lieu of notice that makes up the bulk of their redundancy payment and so this is a change that will be felt quite keenly.

A higher rate of tax for many workers

HMRC will add the redundancy payment to a worker’s annual earnings in order to calculate how much tax is payable. The worker will then pay tax at their highest rate.

This means that redundancy payments will tip many lower paid workers into a higher tax bracket, meaning that they may be paying 40% or even 45% tax plus National Insurance on a redundancy payment that has historically been paid tax free.

Impact on employers of redundancy payment tax changes

The changes will also impact employers, as there will be an employers’ National Insurance contribution on redundancy payments. Employers will have to pay NI at 13.8% on any redundancy payment over £30,000.

For businesses that are planning to make job cuts over the next 15 months or so, it clearly makes sense to bring these forward to before April 2018.

Payroll teams will also need to be ready to implement the changes to ensure that both employer and employee National Insurance contributions are applied correctly.

For help or advice on a tax, accounts, or payroll matter please contact the team at Clayton & Brewill. You can call us on 0115 950 3044 or click here to send us an email.

Clayton & Brewill are chartered accountants in Nottingham, Long Eaton and Melton Mowbray. We offer proactive and cost-effective accountancy advice to business owners, individuals, farmers, buy to let landlords, charities and GPs.