End In Sight For £30K Tax-Free Redundancy Pay

End In Sight For £30K Tax-Free Redundancy Pay

One of the most common questions we are asked as employment solicitors is “Is redundancy pay taxable?”.

Currently employees can potentially receive up-to £30,000 as a tax free termination payment when settling any potential claims. This long-standing tax exemption now looks under threat following the Chancellor’s 2015 Summer Budget Statement.

A report by the Office Of Tax Simplification (OTS), recommended moving away from the current £30,000 tax exemption, which applies to the majority of non-contractual redundancy payments, and instead implementing a system of tax relief applicable to all redundancy pay (contractual or otherwise) if the reason for the dismissal was statutory redundancy.

The OTS report went on to recommend that such relief should be capped at a multiplier of the employee’s entitled statutory redundancy payment.

If these recommended changes are implemented it would mean that all redundancy pay, including contractual, non-contractual, employment tribunal, and court awards would be fully taxable. They would only be exempt in cases of statutory redundancy.

As a result, we may see employees attempting to structure dismissals as statutory redundancies so they can secure the most tax efficient redundancy package, though whether this will be possible in line with any new regulations remains to be seen.

Employers may need to re-assess how they deal with offers of settlement going forward, as they may not be able to rely on the tax free status of the payment as an incentive for employees to agree to waive any rights to bring a claim.

Our solicitors deal regularly advise on settlement agreements and redundancy pay both for employees and employers, if you would like some advice on redundancy pay, settlement agreements, or termination of employment process, contact Stephen Stewart on 01283 526218 or email Stephen.Stewart@elselaw.co.uk

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