What Payments Are Due If I Make Someone Redundant?

Employers are increasingly concerned about life when the furlough scheme has ended.

Owners have some difficult decisions to make about whether they can keep all of their staff employed, and if not, which ones to make redundant.

We want to explain the payments you’ll need to be aware of if you’re planning on making redundancies.


Making Redundancies

Whenever you make an employee redundant there are two types of payments that you will need to make:


Normal payments:
 

These are the payments like wages, salary and accrued holiday pay.

These payments are treated the same as earnings from employment. It’s as if they had been paid to the employee whilst they were still employed.

Therefore they will still be subject to tax and National Insurance even though you’ve made them redundant.

 

Termination Payments: 

These are payments that are paid specifically on the termination of employment. They wouldn’t have been accrued had the employee continued working.

For example, pay in lieu of notice, compensation for loss of office, non-cash benefits and statutory redundancy pay would all fall under this category.

These payments may be taxed either as earnings, or under the specific rules that apply to termination payments.


Statutory Redundancy Pay

If the employee has had at least 2 years of continuous employment at the point they are made redundant, then they will be eligible for this payment.

The amount that they receive will be relevant to their length of service, age, and the level of their wage. 

They’ll get:

  • One and a half week’s pay for each full year that they were aged 41 and over.
  • One week’s pay for each full year that they were 22 and older, but younger than 41.
  • Half a week’s pay for each full year that they were under 22.

Length of service is capped at 20 year and is counted back from the date that the employee was made redundant.

If the employee has spent time on furlough, this time will count towards part of their continuous service. 

Their statutory redundancy pay should be worked out using the employee’s usual pay, rather than a lower amount that they might have received whilst furloughed.


Is There A Tax Free Allowance?

There is a £30,000 tax free threshold when making someone redundant, and an employee’s statutory redundancy pay always counts towards this figure.

Some termination payments can also be counted towards the £30,000 tax free threshold (if it hasn’t been used up already). 

This is worked out by comparing the relevant termination award vs the PENP (post-employment notice pay) which is essentially the amount that the employee would have earned had they worked their notice period.

We’re getting into complicated territory here, but to keep things simple:

If the relevant termination award is higher than this PENP figure, then anything above it can benefit from the £30,000 threshold.

If these extra awards + the statutory redundancy pay take you over the £30,000 threshold, then anything over is taxable.

 

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