How to calculate tax on redundancy
The term "redundancy" is used when you have been dismissed from your employment as a result of your employer closing the business; moving the business to a distant location; or reducing the workforce due to a lack of business and the need to cut costs.The UK Employment Rights Act 1996 specifies that if you have completed two or more years of continuous service with your employer then they must make a minimum redundancy payment. The right to a payment only applies if the reason for your dismissal was redundancy.
To help with the financial burden of redundancy, the government allows you to receive a redundancy payment of up to £30,000 before you have to pay tax. If you receive more than £30,000 you'll need to calculate the tax on the redundancy payment.
Check the amount of redundancy money you have received from your employer. Ensure that the amount you have been paid complies with minimum statutory pay rules as proscribed in the UK Employment Rights Act 1996. The UK Citizens Advice Bureau has detailed information about your rights. Payment is usually a lump sum, payable by cheque or bank draft or credited direct to your bank account. It is not normally included with your final pay cheque. If the payment is less than £30,000 you do not need to calculate tax on your redundancy payment as it is tax free.
Get your final payslip as you need this to calculate the amount of tax due from your redundancy payment. You should also receive HM Revenue and Customs form P45 when you leave. This will detail your total earnings in the tax year and the amount of tax you have paid.
Write down the gross amount you have earned; for example, £20,000. Deduct your personal allowance, which is £10,000 for the 2014/2015 financial year. This gives taxable earnings of £10,000.
Add your redundancy payment, net of the £30,000 tax free amount, to this amount. Let's assume your taxable redundancy payment is £10,000 (£40,000 - £30,000) -- this results in a taxable income of £20,000.
Calculate 20 per cent of your taxable income. In this example it is £24,000 (£20,000 x 0.2 = £4,000).
Deduct the amount of tax you have already paid from the £4,000 (using the example). Get this from your final payslip or P45. Using the example, this is likely to be £2,000 (20 per cent of £10,000). The amount of tax you need to pay on your redundancy payment is therefore £2,000.
- Follow the same steps if your income (after your personal allowance) exceeds the £41,865 higher rate threshold. However, you will need to calculate your tax on redundancy at 20 per cent for the first £41,865 of earnings and 40 per cent for any amount over this threshold.
- Payslip or P45 form