Redundancy – guidance for
This note provides guidance for
employers on the tax treatment of payments and benefits to employees on redundancy.
Read a statutory
definition of redundancy in the Employment Income Manual.
The different components of the redundancy package
When an employee is made redundant they will normally receive a package of
pay and benefits. This package may be made up of a number of components such
- a redundancy payment
- any unpaid salary
- a payment in lieu of notice
- payment for a restrictive covenant
- compensation for loss of office
- non-cash benefits
Some of these components - such as unpaid salary or holiday pay - may be
taxable and liable to National Insurance contributions (NICs) as earnings.
However ‘redundancy payments’ (the component paid as compensation
for redundancy) are not liable for NICs and in the majority of cases are not
taxable up to £30,000. To get the tax and NICs positions right it’s
therefore important to identify the various components of the package correctly.
Statutory redundancy payments vary with age, length of service with the employer
and pay. If you provide additional (non-statutory) amounts for the same reason,
they are treated in the same way as statutory redundancy payments for tax
and NICs purposes.
General guidance on redundancy and calculating redundancy pay
You can find general information on making employees redundant on the Business
Link website. This includes a calculator to help you work out how much redundancy
pay is due.
about redundancy (Opens new window)
Guidance on the tax/NICs treatment of redundancy payments
For further guidance follow the links below.
Answers to frequently asked questions about the tax/NICs treatment
of redundancy payments
Manual - detailed guidance on the tax/NICs treatment of redundancy payments
HMRC’s redundancy factsheet for employees also provides some basic
information on redundancy and how payments are treated for both tax and NICs.
HMRC’s employee factsheet on redundancy (PDF 149K)
Advice for your employees
If your employee asks you for information about how their statutory redundancy
payment has been calculated or taxed you can refer them to the links below.
– information for employees (Opens new window)
employee factsheet on redundancy (PDF 149K)
If you still need help or advice
If you can’t find what you’re looking for by using the links
provided you can:
Frequently asked questions
Note that the links below beginning ‘EIM’ will take you to relevant
pages in the Employment
Income Manual. Those starting ‘NIM’ will take you to relevant
pages in the National
How much statutory redundancy pay is an employee entitled to?
How are the different components of a redundancy package dealt with for tax and NIC purposes?
- Unpaid salary and holiday pay are earnings for tax and NICs.
- Redundancy payments are tax-free up to £30,000 (see
EIM13750) and not liable for NICs (see
NIM02580). Note that in some situations the £30,000 is reduced
- For payments in lieu of notice the position can be complex: see
EIM12975-9. The NICs position follows that for tax.
- Payments for restrictive covenants are earnings for tax and NICs purposes
- Damages payments are dealt with in the same way as redundancy payments
How is PAYE applied?
- See CWG2 (Employers
Further Guide to PAYE and NICs) & EIM13870.
What tax reporting requirements apply for employers?
- A separate report to HMRC is required for some redundancy packages but
not if simply cash (see
Should a copy of the employer’s tax report be given to the employee?
What if the employer is insolvent?
Is £30,000 of a redundancy payment always tax exempt?
- Not always because certain payments must be added together before applying
the exemption (see
How are non-cash benefits dealt with?
- They are valued in the same way as non-cash benefits provided during
EIM13250 & NIM13132).
Does a compromise agreement make any difference to the tax and NIC position?
- No difference for redundancy payments but some elements of the package
may be earnings (see