The Chancellor, Rishi Sunak, has announced reform to the Job Retention furlough scheme which will result in businesses having to initially incur more of the wage costs themselves, with the scheme stopping on 1 November. With a depletion of cash as a result of COVID-19, many businesses will now have to contemplate making staff redundant and taking them off the furlough scheme. The following questions look into the taxation treatment and financing of redundancy payments.
1. Is redundancy pay taxable?
It depends. The first £30,000 of any genuine redundancy payments (both the statutory redundancy pay in accordance with employment law and any additional company-specific redundancy pay, which someone might receive) are regarded as tax-free. If the genuine redundancy payments (statutory and any company-specific supplement) are in excess of a cumulative £30,000, the element above £30,000 is UK taxable.
2. What is statutory redundancy pay?
The maximum statutory redundancy pay is capped at £807 per week (for people over 41, it is £538 for younger employees) for each full year of service with a company and the regulations allow for a maximum of 20 years’ service. As such, the maximum amount payable as statutory redundancy is £16,140. Statutory redundancy is only available for people who have had two years continuous service with an employer.
However, as indicated previously, some companies will make additional, non-statutory redundancy payments to individuals being made redundant and any payments of this type, will be based on company contracts, staff handbooks and company practice.
An important consideration for many businesses is the likelihood of the staff member being required in a post-lockdown world, and the overall level of staffing. An assessment has to be made as to the cost of redundancy compared to the likely wage cost saved from an unutilised member of staff, especially given that the furlough scheme will still be in operation until October.
PILONs, whether contractual or non-contractual, are innately regarded as taxable earnings and do not qualify for the£30,000 tax free relief.
3. What if I receive a Payment in Lieu of Notice (PILON) from my employer?
Payments in Lieu of Notice (PILONs), whether contractual or non-contractual, are innately regarded as taxable earnings and do not qualify for the £30,000 tax free relief. They will be taxed and subject to National Insurance Contributions (NICs) at the point the payment is made.
4. My company will expect me to take garden leave instead of offering me a PILON. How is this taxed?
Whilst you are on garden leave, you will remain an employee of the company for tax purposes and your salary will continue to be subject to PAYE (and NIC) as a regular employee.
5. The company wants me to sign a ‘non-compete agreement’ as part of my redundancy package. Is the payment I receive for this non-compete agreement taxable?
Yes. Payments for agreeing to a non-compete agreement (also known as a restrictive covenant) will be regarded as taxable at the time of payment.
Businesses must consider the need for such non-compete clauses. If the company is generating little to no income, the benefit of the covenant may be remote.
6. My redundancy package will allow me to keep my company car after I leave the company. Does this remain a taxable benefit?
The value of the company car that is transferred to you would be taxable at its market value at the time of transfer.
7. I cannot afford to make redundancy payments, but I have a viable business. Are there any other options?
The Redundancy Payments Office, in certain situations can make a ‘loan’ to the company to pay these liabilities. The redundancy will be actually paid to the employee and the company will need to pay back the payment on a timescale to be agreed. This can be from one to three years. There are certain conditions that apply to the loan. Broadly, you must have a viable business, but for the requirement to make these payments, and you cannot have alternative resources to pay the redundancies.
Would you like to know more?
If you would like further guidance on the taxation treatment and financing of your redundancy payments, please get in touch with your usual Blick Rothenberg or one of the contacts to the right.
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