Redundancy – guidance for employers

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 as:

  • a redundancy payment
  • any unpaid salary
  • damages
  • 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.

Read 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

Employment Income 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.

Download 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.

Redundancy – information for employees (Opens new window)

HMRC’s 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 Insurance Manual.

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 (see EIM13530)
  • 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 (see EIM03600 & NIM02320)
  • Damages payments are dealt with in the same way as redundancy payments (see EIM13070)

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 EIM13844).

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 EIM13530).

How are non-cash benefits dealt with?

  • They are valued in the same way as non-cash benefits provided during employment (see 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 EIM12855).